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**UNITED
      STATES**


**SECURITIES
      AND EXCHANGE COMMISSION**


**WASHINGTON,
      D.C. 20549**





**FORM
      10-KSB**





x
            Annual
                Report Pursuant to Section 13 or 15 (d) of the Securities Exchange
                Act of
                1934 (the “Exchange Act”)For
                the fiscal year ended: February 28,
                2006




or


o
            Transition
                Report Pursuant to Section 13 or 15 (d) of the Securities Exchange
                Act of
                1934




Commission
      File Number: 0-7900




**LIFE
      PARTNERS HOLDINGS, INC.**


(Name
      of
      small business issuer in its charter)


Texas
              (State
                of incorporation)
            74-2962475
              (I.R.S.
                Employer ID no.)204
                Woodhew
              Waco,
                Texas
              (Address
                of Principal Executive Offices)
            76712
              (Zip
                Code)




Issuer’s
      telephone number, including area code: 254-751-7797




Securities
      registered pursuant to Section 12(b) of the Exchange Act: None




Securities
      registered pursuant to Section 12(g) of the Exchange Act:




**Common
      Stock (par value $0.01 per share)**


(Title
      of
      Class)




Check
      whether the issuer is not required to file reports pursuant to Section 13 or
      Section 15(d) of the Exchange Act.  o




Check
      whether the issuer (1) filed all reports required to be filed by Section 13
      or
      15(d) of the Exchange Act during the past 12 months (or for such shorter period
      that the issuer was required to file such reports), and (2) has been subject
      to
      such filing requirements for at least the past 90 days. Yes x No o




Check
      if
      there is no disclosure of delinquent filers pursuant to Item 405 of Regulation
      S-B contained herein, and will not be contained, to the best of the issuer’s
      knowledge, in definitive proxy or information statements incorporated by
      reference in Part III of this Form 10-KSB or any amendment to this Form 10-KSB.
      o




Indicated
      by a check mark whether the issuer is a shell company (as defined in
      Section 12b-2 of the Exchange Act. o




Revenues
      of issuer for year ended February 28, 2006: $ 20,083,653




The
      aggregate market value of the Common Stock held by non-affiliates of the issuer
      was approximately $ 23,576,913, as of
      May 23, 2006, based on average bid and asked prices on the Nasdaq Small Cap
      Market **** reported
      for such date. Shares held by each officer and director and by each person
      who
      owns 5% **** or
      more
      of the outstanding Common Stock have been excluded in that such persons may
      be
      deemed to be affiliates. This standard for determining affiliate status is
      not
      necessarily the appropriate standard for other purposes.




Shares
      of
      Common Stock, $.01 par value, outstanding as of May 23, 2006: 9,615,586




**DOCUMENTS
      INCORPORATED BY REFERENCE**




Our
      definitive proxy statement in connection with the Annual Meeting of Shareholders
      to be filed with the Commission pursuant to Regulation 14A, is incorporated
      by
      reference into Part II, Item 5 and Part III of this report.









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**LIFE
      PARTNERS HOLDINGS, INC.**




**2006
      Form 10-KSB Annual Report**


**Table
      of Contents**




**ITEM**
            
            **PAGE
                NO.**PART
                ISpecial
                Note Regarding Forward-Looking
                Statements
            31.
            Description
                of Business
            3Risk
                Factors
            102.
            Description
                of Property
            133.
            Legal
                Proceedings
            134.
            Submission
                of Matters to a Vote of Security
                Holders
            14PART
                II5.
            Market
                for Our Common Stock, Related Shareholder Mattersand Our Purchases of Equity Securities
            146.
            Management’s
                Discussion and Analysis
            157.
            Financial
                Statements
            218.
            Changes
                in and Disagreements with Accountants on Accounting
                and Financial Disclosures
            218A.
            Controls
                and Procedures
            218B.
            Other
                Information
            21PART
                III9.
            Directors
                and Executive Officers; Compliance with Section
                16(a) of the Exchange Act
            2110.
            Executive
                Compensation
            2211.
            Security
                Ownership of Certain Beneficial Owners and
                Management and Related Shareholder Matters
            2212.
            Certain
                Relationships and Related
                Transactions
            2213.
            Exhibits
            2214.
            Principal
                Accountant Fees and Services
            22Signatures
            23Table
                of Contents to Consolidated Financial Statements and
                Notes
            24Exhibit
                Index
            38






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**PART
      I**




**Special
      Note Regarding Forward-Looking
      Statements**




Certain
      statements in this annual report on Form 10-KSB concerning our business
      prospects or future financial performance, anticipated revenues, expenses,
      profitability or other financial items, growth in the viatical or life
      settlement markets or our projected sales in such markets, developments in
      industry regulations and the application of such regulations, and our
      strategies, plans and objectives, together with other statements that are not
      historical facts, are “forward-looking statements” as that term is defined under
      the federal securities laws. All of these forward-looking statements are based
      on information available to us on the date hereof, and we assume no obligation
      to update any such forward-looking statements. Forward-looking statements
      involve a number of risks, uncertainties, and other factors, which could cause
      actual results to differ materially from those stated in such statements.  Factors
      that could cause or contribute to such differences include, but are not limited
      to, those discussed in this annual report on Form 10-KSB, particularly in the
      sections entitled “Item 1 - Business - Risk Factors” and “Item 6 - Management’s
      Discussion and Analysis”. We do not undertake any obligation to release publicly
      any revisions to such forward-looking statements to reflect events or
      uncertainties after the date hereof or reflect the occurrence of unanticipated
      events.




**Item
      1. Description of Business**




**Life
      Partners**




*General* .
      Life
      Partners Holdings, Inc. (“We” or “Life Partners”) is the parent company of Life
      Partners, Inc. (“LPI”). LPI is the oldest and one of the largest viatical and
      life settlement companies in the world. In addition, we are the only publicly
      held viatical and life settlement company in the world.




*The
      Viatical and Life Settlement Business* .
      LPI was
      incorporated in 1991 and has conducted business under the registered service
      mark “Life Partners” since 1992. Our revenues are principally derived from fees
      for facilitating the purchase of viatical and life settlement contracts. A
      viatical settlement is the sale of a life insurance policy by a terminally
      ill
      person to another party. By selling the policy, the insured (a viator) receives
      an immediate cash payment to use as he or she wishes. The purchaser takes an
      ownership interest in the policy at a discount to its face value and receives
      the death benefit under the policy when the viator dies. We maintain a worldwide
      client base of viatical settlement purchasers composed of high net worth
      individuals or small institutional purchasers.




A
      life
      settlement differs from a viatical settlement in that the insured in a life
      settlement (a life settlor) is not terminally ill, is 65 years of age or older,
      and has a life expectancy of 15 years or less. Life settlements are an
      attractive transaction to persons who purchased life insurance for income
      protection or estate planning, but no longer need the insurance due to growth
      in
      their investment portfolios or other changes in circumstances. Life settlements
      also appeal to persons who want to make immediate gifts to their beneficiaries.
      In these instances, the insured may feel the insurance is no longer needed.
      Because these policies often have substantially larger face values, their
      acquisition costs are higher. Therefore, purchasers of life policies are
      generally large institutional purchasers, although smaller face value policies
      are attractive to the same kind of purchaser in a viatical
      settlement.




Since
      the
      market for viatical settlements has grown to include life expectancies that
      are
      often associated with life settlements and the age and medical condition of
      many
      life settlors gives them a life expectancy that is similar to many viators,
      the
      distinction between these two market segments has diminished and the markets
      have largely merged. State regulations govern both types of transactions in
      essentially the same manner, and the services we provide for both types of
      transactions are the same. Thus, we view both viatical and life settlements
      to
      be within the same line of business and do not distinguish between them for
      financial reporting purposes.




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Our
      role
      in a viatical or life settlement transaction is the same. We match viators
      or
      life settlors with purchasers. We facilitate these transactions by identifying,
      examining, and purchasing the policies as agent for the purchasers. LPI locates
      potential viators and life settlors through a network of brokers, insurance,
      financial and estate planning professionals, through personal referrals and
      through Internet and print media advertising. Brokers are typically compensated
      based on a percentage of the face value of a viator’s policy, which is paid upon
      the closing of a settlement. Estate planning professionals and financial
      planners typically operate on a fee-for-service basis, which is paid directly
      by
      their client. We have long-term relationships with most of the country's
      viatical and life settlement brokers and believe that these brokers adhere
      to
      applicable regulatory requirements when conducting their business. In the fiscal
      year ended February 28, 2006, broker referrals accounted for 90% of the total
      face value of policies transacted compared to 88% in fiscal 2005. Policies
      presented from two brokers constituted 68% of the total face value of all
      completed transactions presented by brokers during fiscal 2006. This compares
      to
      a concentration of 48% of the total face value of all completed transactions
      from a single broker in fiscal 2005.




Life
      settlements have grown in relationship to viatical settlements, and the
      relatively higher acquisition costs of life settlements has led us to develop
      relationships with institutional purchasers. We have devoted substantial
      marketing and client development resources to attracting institutional
      purchasers, both domestically and abroad and both directly and through their
      advisors. We have experienced success in attracting such clients and believe
      that we will continue to attract such institutions as we devote more time and
      resources into cultivating relationships with them. One disincentive for
      domestic institutional investment had been the accounting treatment applied
      to
      viatical and life settlements, which generally required that settlements be
      recorded at lower cash surrender values instead of their purchase prices. This
      treatment often resulted in write-downs for financial reporting purposes.
      However, the Financial Accounting Standards Board has recently amended certain
      provisions of FSP Technical Bulletin 85-4 to allow life settlements to be
      treated as an investment asset valued on either an investment value or fair
      value method. This revised treatment means that settlements will generally
      be
      recorded at their purchase price without a write-down in value. The amendments
      are expected to become effective in June 2006. We believe the adoption of this
      more favorable accounting treatment will spur institutional investment,
      especially in the domestic market. Such a change will also have a positive
      effect on policies in which we own an interest.




Purchasers
      of viatical and smaller life settlements generally come to us through a network
      of financial planners, whom we call licensees. We develop this network through
      referrals and have long-standing relationships with most of the financial
      planners. Although these financial planners can be compensated through fee-based
      consultations paid by the purchaser, we compensate most of the financial
      planners based on the amount invested. The compensation of financial planners
      is
      paid in cash generally upon the closing date of the transaction.




To
      purchase a viatical or life settlement, a prospective purchaser typically
      submits a purchaser application, which contains personal information such as
      the
      purchaser’s name and address as well as affirmative representations establishing
      the purchaser as financially sophisticated. A purchaser will also submit an
      agency agreement and special power of attorney, which appoints us as a limited
      agent of the purchaser to act on his or her behalf in purchasing a viatical
      settlement. Unless specifically waived by a purchaser, the agency agreement
      limits our authority to policies issued by an insurance carrier having an A.M.
      Best rating of A- or better, to policies beyond their contestable period
      (generally two years or older), and, in the case of viatical settlements, to
      insureds diagnosed as terminally ill. While in the past most insureds have
      had a
      life expectancy of 60 months or less, we have expanded this market to include
      insureds with life expectancies of up to seven years for viatical settlements
      and up to 15 years for life settlements, depending on the purchasing parameters
      of each client. As we identify and qualify policies which generally fit within
      the purchasing parameters of our clients, we distribute insurance and current
      medical status information on these policies (with the viator’s name and other
      identifying information redacted) throughout our financial planner network.
      We
      also make available to each financial planner standard disclosures discussing
      the nature and risks of viatical and life settlement purchases. A purchaser
      can
      then, in consultation with his financial planner or other professionals
      available to them, select one or more policies, specify the portion of the
      policy or policies to be purchased (to diversify their positions, individual
      purchasers generally buy fractional interests in one or more policies and not
      an
      entire policy, while institutional purchasers tend to purchase entire policies),
      and submit a reservation form either electronically or by fax. At the same
      time,
      the purchaser mails or wires the acquisition price to the escrow agent and
      mails
      or faxes a policy funding agreement to us. The policy funding agreement
      identifies the policy or policies to be purchased, the acquisition price, the
      administrative services provided, and the escrow arrangements for receipt and
      disbursement of funds. In essence, we act upon the instructions of the
      purchasers as their purchasing agent.




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For
      the
      protection of the seller’s ownership interest and the purchaser’s monetary
      interest, all transactions are closed through an independent escrow agent,
      Sterling Trust Co. (“Sterling”), which is a wholly-owned subsidiary of Matrix
      Bancorp, Inc. (Nasdaq NMS: MTXC). Sterling will close a purchase when it
      receives from purchasers executed policy funding agreements and the acquisition
      price for a policy, verifies that the policy is in full force and effect and
      that no security interest has attached to the policy, and receives a transfer
      of
      policy ownership form acknowledged by the insurance company. Sterling then
      pays
      the seller the offer price (net of fees and costs). After the closing, we send
      confirmation of the transaction to the purchaser as well as a copy of the
      assignment documents.




After
      closing the transaction, we generally hold title to the policy as nominee for
      the purchaser. Responsibility for policy premium costs passes to the purchaser,
      who typically funds the premium costs through deposits with Sterling. We
      strictly maintain the confidentiality of a viator’s or life settlor’s personal
      information in accordance with regulations promulgated by the Texas Department
      of Insurance. A purchaser will receive a copy of the policy and the transfer
      of
      ownership (which has the viator or life settlor named as the insured), but
      will
      not receive viator contact information, which is available only to licensed
      viatical companies (like LPI). We monitor the viators’ and life settlors’ health
      status and notify Sterling upon their death. We also notify purchasers in
      instances in which the premium escrow account has been exhausted so that the
      purchaser can replenish the account to keep the policy from lapsing.




We
      pioneered the foregoing transaction design and, since our formation, we have
      participated in the purchase of viatical and life settlement transactions
      totaling over $580 million in face value.




*The
      Viatical and Life Settlement Market and Competition* .
      Viatical and life settlements provide a secondary market for existing life
      insurance policies which the owner no longer needs or wants and which insure
      a
      person whose life expectancy can be reasonably estimated. Because we are the
      only publicly held company operating in this market, accurate public information
      on market size and competition is difficult to quantify. Our estimations are
      based, in part, on transaction activity filed with various state insurance
      commissions as well as our own market experience. However, not every company
      may
      make such filings and the accuracy of the information relies on the veracity
      of
      the filings made by each company. While measuring the market is difficult due
      to
      the lack of reported data, based on known transaction volumes with allowance
      for
      unreported data, we estimate that the total face value of viatical and life
      settlement transactions completed during 2005 was approximately $2.5 billion.
      This figure gives us a market share of approximately 3.7%. The largest industry
      competitor captured approximately 43% of the market last year because of its
      affiliate relationship with a large insurance company acting as an institutional
      purchaser. The remainder of the market is divided among other competitors,
      none
      of whom is believed to have more than 10% of the market. These figures reflect
      both viatical and life settlements transacted by us and others, but not all
      of
      our competitors are active in all segments of the market. The life settlement
      market emerged out of the viatical settlement market because the transactions
      are so similar in nature. Whether an insured has a reasonably definable life
      expectancy because he or she is terminally ill or because of advanced age,
      a
      present value for the policy can be reasonably calculated. This is the essence
      of both viatical and life settlement transactions. Unlike some of our
      competition, which have more restrictive purchasing parameters, we have
      developed markets for all types of life expectancies in order to accommodate
      the
      investment goals of our clients as well as the individual circumstances of
      the
      policies presented to us. We believe this business model makes us more
      competitive in the market and provides us with greater flexibility. We also
      believe that this model provides a stronger platform for our sustainable growth
      as a company. Markets are segmented by length of life expectancy and policy
      face
      value. The amount of competition in these markets varies according to the demand
      for such policies.




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We
      believe the viatical and life settlement market in general will substantially
      increase during the next year due to a number of factors. First, market demand
      from purchasers remains strong for these transactions. While our historical
      core
      of individual purchasers continue to focus on life expectancies between two
      and
      seven years, we have also developed substantial interest from and purchased
      policies for institutional purchasers, which tend to favor longer life
      expectancies. We also note that competition for such policies has increased,
      indicating that there is an increased awareness among the financial markets
      in
      general of the value of life settlements as an investment vehicle. The favorable
      market demand is also due, in part, to a continued cautious attitude of
      purchasers and a desire for alpha (i.e. returns which are not correlated to
      market indices). We believe we have successfully educated many individual and
      institutional purchasers about the potential returns available from viatical
      and
      life settlements and the inherent diversity they offer from traditional types
      of
      investments. Continued general economic uncertainty has led many purchasers
      to
      seek alternative investment strategies that diversify their portfolios and
      avoid
      economically sensitive investments. Viatical and life settlements provide
      diversification and are largely independent of the factors contributing to
      economic downturns, such as interest rate fluctuations and increasing fuel
      costs. We believe that interest from both individual and institutional
      purchasers will continue to grow steadily throughout the next fiscal year.




As
      a form
      of competition to viatical and life settlements, the life insurance industry
      has
      responded with policy features offering various pre-death, cash benefits
      (sometimes called accelerated death benefits). While in some cases accelerated
      death benefits may compete with viatical settlements, we do not expect the
      availability of accelerated death benefits to affect the viatical or life
      settlement market significantly at this time. The availability of accelerated
      death benefits is generally more restricted than viatical or life settlements.
      For example, policies often limit such benefits to persons who have a life
      expectancy of less than one year, in contrast to viatical and life settlements
      that are usually available to persons with life expectancies of two to 15 years.
      Viatical and life settlements generally offer sellers greater amounts than
      they
      would receive under accelerated death benefit provisions. An insurance company’s
      willingness to offer a competitive accelerated death benefit, and the amount
      of
      such benefit, may be affected by imputed policy lapse rates. The availability
      and amount of an accelerated death benefit negatively impacts lapse rates,
      which
      could increase policy rates. The competition for new policies limits policy
      rates and may, indirectly, limit the availability and amount of accelerated
      death benefits. In addition, we are aware of at least one insurance company
      actively purchasing life settlements using one of our competitors as its
      agent.




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The
      viatical and life settlement market has been negatively affected by some
      companies using illegal or questionable business practices. We believe that
      state and federal regulators have effectively identified and shut down most
      of
      the companies that were engaged in such practices. The result of these law
      enforcement actions has been to reduce the amount of competition for both
      policies and purchasers. Although state and federal law enforcement officials
      successfully employed existing laws to curb these illegal practices, state
      legislatures and insurance regulators have passed laws and adopted regulations
      requiring the licensing of viatical brokers and settlement companies, mandated
      disclosures to viators or purchasers or both, and instituting periodic reporting
      requirements, and setting forth prohibited business practices. We believe these
      laws and regulations have generally had a positive effect on the industry and
      on
      our ability to compete in the viatical marketplace. We are licensed as a
      viatical and life settlement company in the State of Texas and information
      about
      us is available through the Texas Department of Insurance or on its website
      at:




https://wwwapps.tdi.state.tx.us/pcci/pcci_show_profile.jsp?tdiNum=8967842




Access
      to
      capital, the insurance industry’s addition of pre-death cash benefits, law
      enforcement pressure on companies operating illegally and increasing government
      regulation have contributed to a stabilization in the number and sophistication
      of viatical and life settlement companies, both those purchasing for their
      own
      accounts and those, like us, who act as agents for our purchasers. We estimate
      the number of viatical and life settlement companies actively purchasing for
      their own account or as agents for purchasers to be approximately 12 and the
      number of active viatical and life settlement brokers at about 25. We are
      unaware of any company that purchases viatical settlements exclusively. The
      market has matured and developed to a point  where
      there is no effective market distinction between viatical and life settlements.
      Our competitors purchase either life settlements exclusively or, like us, a
      combination of viatical and life settlements. While we believe we are one of
      the
      largest viatical and life settlement companies (based on face value of policies
      settled), competition within the viatical and life settlement market is active
      among the few companies in this sector and we will continue to experience
      competition for new viators and life settlors. This competition will have an
      effect on the prices we pay viators and life settlors, the amount of brokerage
      and referral fees we pay and the prices we set for the acquisition of policies.
      We believe the overall market for viatical and life settlements will increase
      as
      more seniors become aware of their option to liquidate an unwanted policy
      through a life settlement. In light of our experience in the market and our
      estimates concerning competition and supply and demand for policies, we believe
      our total business volume for viatical and life settlements will be $100 to
      $120
      million in face value for the fiscal year 2007. We base this estimate on the
      level of business volume we experienced last year as well as an extrapolation
      from the current year’s business volume. Our total business volume during the
      2006 fiscal year was approximately $87 million in face value. This amount
      represents a 34% increase over the $65 million of our total business volume
      in
      fiscal year 2005.




The
      following table shows the number of viatical and life settlement contracts
      we
      have transacted, the aggregate face values and purchase prices of those
      contracts, and the revenues we derived, for our fiscal years ended February
      29,
      2004, February 28, 2005 and February 28, 2006:




**2004**
            
            **2005**
            
            **2006**Number
                of settlements
            
            
            333
            
            
            289
            
            
            259Face
                value of policies
            
            $
            41,953,000
            
            $
            65,082,000
            
            $
            87,275,000Average
                revenue per settlement
            
            $
            46,837
            
            $
            64,865
            
            $
            77,543Total
                net revenues derived(1)
            
            $
            8,218,000
            
            $
            9,166,000
            
            $
            8,485,000





(1)
            The
                revenues derived are exclusive of brokerage and referral
                fees.






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We
      have
      increased our efforts to market our services to institutional investors and
      have
      been successful in attracting institutional clients. We will continue these
      marketing efforts to institutions and seek to develop services and lines of
      business specifically tailored for the needs of institutional investors.




In
      January 2006, we announced the formation of a
      limited
      partnership arrangement with a large
      U.S.-based investment firm. The limited
      partnership was designed to
      invest
      $50 million in life settlement contracts purchased through LPI during fiscal
      2007. The limited partnership has not made any purchases to date, however,
      due
      to the stringent underwriting standards that the general partner is applying
      to
      the available contracts. The arrangement provides for a right of first refusal
      for policies with face amounts over $2.0 million. If no purchases are made
      by
      August 13, 2006, the arrangement may be terminated by us without penalty. Our
      experience with this limited partnership arrangement has not been typical of
      our
      experience with other institutional purchasers.




**Industry
      Regulation and Taxation**




*General* .
      When
      the viatical market first arose, it was sparsely regulated. Due in part to
      abuses within the industry, which were well-publicized, both the federal
      government and various states moved to regulate the market in the mid-1990’s.
      These regulations generally took two forms. One sought to apply consumer
      protection-type regulations to the market. This application was designed to
      protect both viators and purchasers. Another sought to apply securities
      regulations to the market, which was designed to protect purchasers. Various
      states have also used their insurance regulations to attack instances of
      insurance fraud within the industry.




*Consumer
      Protection Licensing* .
      The
      consumer protection-type regulations arose largely from the draft of a model
      law
      and regulations promulgated by the National Association of Insurance
      Commissioners (NAIC). At least 35 states have now adopted some version of this
      model law or another form of regulation governing in some way viatical or life
      settlement companies or both. These laws generally require the licensing of
      providers and brokers, require the filing and approval of settlement agreements
      and disclosure statements, describe the content of disclosures that must be
      made
      to potential viators and/or life settlors, describe various periodic reporting
      requirements for settlement companies and prohibit certain business practices
      deemed to be abusive.




*Licensing
      in Texas* .
      We are
      licensed as a viatical and life settlement company by the Texas Department
      of
      Insurance. Under the Texas requirements, we must file our transaction documents
      with the state for approval, make certain disclosures to viators and life
      settlors, offer a 15-day right of rescission to the viator or life settlor,
      file
      certain annual reports with the state, and abstain from unfair business
      practices. Because all of our transactions occur in Texas, the Department of
      Insurance has jurisdiction to investigate complaints from any viator or life
      settlor, irrespective of the state in which that viator or life settlor
      lives.




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*Securities
      Regulations* .
      Some
      states and the Securities and Exchange Commission have attempted to treat
      viatical settlements as securities under federal or state securities laws and
      have successfully done so in circumstances in which the transactions were
      structured as securities. No state or federal regulatory body or private
      litigant has successfully asserted that our viatical and life settlements are
      securities under state or federal law. Due to the manner in which we structure
      our settlements and utilizing, in some instances, the exceptions and exemptions
      under securities laws, such laws have not limited our business model to a
      significant extent.




We
      believe that a combination of consumer protection-type laws and existing
      insurance regulations provide an appropriate framework for regulation of the
      industry. The widespread application of securities laws would, as a practical
      matter, prevent us and other viatical and life settlement companies from
      marketing settlements with little or no benefit to purchasers. Each of our
      purchasers has represented themselves to be sophisticated individuals or
      institutions, which have little need for the protections afforded by the
      securities laws. At this point, the possible application of such laws has not
      had an adverse, material effect on our business, but we cannot give assurance
      that our business would not be materially and adversely impacted by a
      securities-based action.




*Insurance
      Regulation* .
      As a
      viatical and life settlement company, we facilitate the transfer of ownership
      in
      life insurance policies, but do not participate in the issuance of policies.
      We
      are not required to be licensed as an insurance company or an insurance
      professional. We do, however, deal with insurance companies and professionals
      in
      our business and are indirectly affected by the regulations covering them.
      The
      insurance industry is highly regulated, and these regulations affect us in
      numerous ways. We must understand the regulations as they apply to policy terms
      and provisions and the entitlement to, and collectibility of, policy benefits.
      We rely upon the protections against fraudulent conduct that these regulations
      offer and we rely upon the licensing of companies and individuals with whom
      we
      do business.




*Taxation* .
      In
      1996, Congress passed the Health Insurance Portability and Accountability Act.
      This act exempts from taxation proceeds received in a viatical settlement paid
      to terminally ill viators (those having a life expectancy of 24 months or less)
      and chronically ill viators (those who are incapable of at least two
      daily-living activities, such as eating and bathing, and require supervision).
      The tax exemption applies only if the viatical settlement company is licensed
      in
      the state in which the viator resides, or if the viator resides in a state
      that
      does not license viatical companies, if the viatical company can certify that
      it
      complies with the model act provisions. Because we are licensed in Texas, we
      believe that, under the 1996 act, qualifying viators will not be subject to
      federal income tax from viatical settlements that we facilitate. Since most
      states follow the Federal income tax definitions, the receipt of settlement
      proceeds is generally exempt for state income tax purposes also.




The
      act
      does not exempt the receipt of life settlement proceeds. Life settlement
      proceeds would typically be taxed as ordinary income to the extent that the
      proceeds exceed the premiums paid for the insurance policy.




**Employees**




As
      of
      February 28, 2006, we had 37 direct employees, none of whom are represented
      by a
      labor union, as well as over 1,000 licensees who act as independent contractors
      and refer clients to us for the purchase of viatical and life settlements.
      We
      continuously review benefits and other matters of interest to our employees
      and
      consider our employee relations to be satisfactory.




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            Statements**




**More
      about Life Partners**




Our
      executive offices are located at 204 Woodhew, Waco, Texas 76712 and our
      telephone number is 254-751-7797. Our corporate information website is www.lphi.com .
      We make
      available without charge our annual report on Form 10-KSB, our quarterly reports
      on Form 10-QSB, current reports on Form 8-K, and amendments to these
      reports shortly after we file these reports with the SEC. Our informational
      website for viators and life settlors is www.lifepartnersinc.com .




**RISK
      FACTORS**




In
      addition to other information in this annual report on Form 10-KSB and in the
      documents we are incorporating by reference, the following risk factors should
      be carefully considered in evaluating us and our business. Such factors
      significantly affect or could significantly affect our business, operating
      results or financial condition. This annual report on Form 10-KSB contains
      forward-looking statements that have been made pursuant to the provisions of
      the
      Private Securities Litigation Reform Act of 1995. Actual results could differ
      materially from those projected in the forward-looking statements as a result
      of
      the risk factors set forth below and elsewhere in this annual report on Form
      10-KSB.




**We
      Are Operating in Markets that May Change Dramatically**




We
      are
      operating in the viatical and life settlement markets. The viatical settlement
      market is approximately 15 years old. While the market saw tremendous growth
      in
      its initial years, the market growth in recent years has moderated somewhat.
      The
      life settlement market is less than a decade old. How and to what extent it
      will
      develop is uncertain. Because we are the only publicly reporting company in
      this
      industry, the ability to measure the market is difficult to quantify. However,
      based on public filings and our market experience, we believe the current life
      settlement market is between $2 to 3 billion of face value. As more insureds
      become aware of life settlements as a financial planning option, we expect
      the
      size of the market to grow substantially. While
      we
      have de monstrated
      our ability to originate, underwrite and place life settlements as well as
      viatical settlements, any dramatic growth will depend heavily upon the entry
      of
      institutional purchasers. Whether we can attract institutional purchasers will
      depend on our ability to convince these purchasers that we can originate
      sufficient numbers of qualified policies for purchase and that our policy
      analysis and pricing practices are sound. Until we attract a sufficient number
      of institutional clients to provide for consistent and predictable demand,
      our
      financial performance during any period may be dramatically affected by the
      entry or departure of one or more of our institutional clients from the market.




While
      we
      are among the most experienced and largest companies within these markets,
      our
      prospects must be considered in light of the risks, expenses and difficulties
      encountered by those attempting to operate in rapidly evolving markets. We
      cannot assure you that we will be successful in addressing the risks we face.
      The failure to do so could have a material adverse effect on our business,
      financial condition, and results of future operations.




**Our
      Operating Results in One or More Future Periods Are Likely to Fluctuate and
      May
      Fail to Meet Expectations.**




While
      our
      revenues have steadily grown, our net operating results have fluctuated in
      the
      past and may fluctuate significantly in the future depending on purchaser demand
      for viatical and life settlements and the timing of settlement closings. Because
      of these or other factors, our operating results may, in some future period,
      fall below market expectations. In such event, the market price of our
      securities might fall. Moreover, fluctuations in our operating results may
      also
      result in volatility in the market price of our securities.




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**Our
      Success Depends on Maintaining Relationships Within Our Referral
      Networks**




We
      rely
      primarily upon brokers to refer potential viators and life settlors to us and
      upon financial planners, known as licensees, to refer viatical and life
      settlement purchasers to us. These relationships are essential to our operations
      and we must maintain these relationships to be successful. We do not have fixed
      contractual arrangements with the brokers or financial planners and they are
      free to do business with our competitors. In addition, the pool of brokers
      and
      referring financial planners is relatively small, which can increase our
      reliance on our existing relationships. During fiscal 2006, two brokers
      accounted for 53% of the policies we purchased based on face value. This
      compares with a concentration of 48% of policies from a single broker last
      year.
      In recent years, we have increased our advertising and market presence in order
      to attract viators and life settlors to us directly. These efforts have resulted
      in large increases in the number of policies submitted to us directly. During
      fiscal 2006, 105 policies were submitted to us directly compared to 180
      policies that were submitted by brokers. Policies submitted directly tend to
      have much smaller face amounts, however, and such policies represented only
      10%
      of the total face value of all policies closed in fiscal 2006 and 12% in fiscal
      2005. We are also developing our own network of insurance and financial planning
      professionals, known as producers, to refer potential sellers to us, and we
      expect referrals from this source to grow. As with brokers, our ability to
      build
      and maintain these relationships will depend upon our closing rates and the
      level of compensation we pay to the referring professional. The compensation
      paid to the referring professional will affect the offer price to the seller
      and
      the compensation we receive. We must balance these interests successfully to
      build our referring network and attain greater profitability.




**Substantial
      Growth in the Life Settlement Market Will Depend on Institutional Sources of
      Capital**




Since
      1997, we have pursued the life settlement market by soliciting life settlors
      and
      establishing a division dedicated exclusively to attracting institutional
      clients, both domestically and abroad. We have experienced success in attracting
      such clients and believe that we will continue to attract such institutions
      as
      we devote more time and resources into cultivating relationships with them.
      We
      believe that the development of such relationships is a key to substantial
      growth, but we cannot be certain during what period or periods any such
      institution may choose to do business with us, what the terms of such
      involvement might be, or how much funding might be involved.




**We
      Depend on Growth in both the Viatical and Life Settlement
      Market**




While
      the
      existing markets for viatical and life settlements provide opportunity for
      growth, greater opportunity lies in the growth in the life settlement market.
      Growth of the life market and our expansion within the market may be affected
      by
      a variety of factors, including:




·
            the
                inability to locate sufficient numbers of life
                settlors;




·
            the
                inability to convince potential sellers of the benefits of life
                settlements;




·
            the
                inability to attract institutional
                purchasers;




·
            competition
                from other life settlement companies;




·
            the
                occurrence of illegal or abusive business practices resulting in
                negative
                publicity about the market; and




·
            the
                adoption of overly burdensome governmental regulation.






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            Statements**




In
      addition, the life settlement market may evolve in ways we have not anticipated
      and we may be unable to respond in a timely or cost-effective manner. If the
      life settlement market fails to grow as quickly as or in the directions we
      have
      anticipated, our business, financial condition and results of operations would
      be materially adversely affected as it relates to our large-scale
      growth.




**Our
      Purchasers Depend on Our Abilities to Predict Life Expectancies; If We Are
      Not
      Accurate, We Will Lose Purchasers; We Must Purchase In Large
      Numbers**




A
      purchaser’s investment return from a viatical or life settlement depends
      primarily on the demise of the insured. We price settlements based on the
      anticipated life expectancy of an insured. For viatical settlements, life
      expectancies are estimated based on a medical analysis of the insured. For
      life
      settlements, life expectancies are estimated from medical and actuarial data
      based on the historical experiences of similarly situated persons. The data
      is
      necessarily based on averages involving mortality and morbidity statistics.
      The
      outcome of a single settlement may vary significantly from the statistical
      average. It is impossible to predict any one insured’s life expectancy exactly.
      To mitigate the risk that an insured will outlive his or her predicted life
      expectancy, viatical and life settlement purchasers must be able to bear a
      non-liquid investment for an indeterminate period of time.




If
      we
      underestimate the average life expectancies, our purchasers will not realize
      the
      returns they seek, demand will fall, and purchasers will invest their funds
      elsewhere. In addition, amounts escrowed for premiums may be insufficient to
      keep the policy in force. If we overestimate the average life expectancies,
      the
      settlement prices we offer viators and life settlors will fall below market
      levels, supply will decrease, and viators and life settlers will opt for other
      alternatives. Our ability to accurately predict life expectancies is affected
      by
      a number of factors, including:




·
            the
                accuracy of our life expectancy estimations, which must sufficiently
                account for factors including an insured’s age, medical condition, life
                habits (such as smoking), and geographic
                location;




·
            our
                ability to anticipate and adjust for trends, such as advances in
                medical
                treatments, that affect life expectancy data;
                and




·
            our
                ability to balance competing interests when pricing settlements,
                such as
                the amounts paid to viators or life settlors, the acquisition costs
                paid
                by purchasers, and the compensation paid to ourselves and our referral
                networks.




To
      foster
      the integrity of our pricing systems, we use both in-house and outside experts,
      including medical doctors and published actuarial data. We cannot assure you
      that, despite our experience in settlement pricing, we will not err by
      underestimating or overestimating average life expectancies or miscalculating
      reserve amounts for future premiums.  If
      we do
      so, we could lose purchasers or viators and life settlors, and those losses
      could have a material adverse effect on our business, financial condition,
      and
      results of operations.




**Government
      Regulation Could Negatively Impact Our Business**




We
      are
      licensed and regulated by the Texas Department of Insurance as a viatical and
      life settlement company. Texas law requires the licensing of viatical and life
      settlement providers and governs many aspects of our conduct, operations,
      advertising and disclosures. Similar laws in other states can affect our
      activities and those of brokers with whom we do business. In addition, some
      states and the Securities and Exchange Commission treat viatical and life
      settlements as securities under state and federal securities laws. Because
      of
      legal precedent relating to the structure of our transactions, we do not believe
      that the application of securities laws will have a material adverse effect
      on
      our operations, but
      cannot assure you that state regulators or private individuals will not file
      these types of actions in the future or that such actions would not have a
      material adverse effect on our business. In addition, the State of Virginia
      has
      claimed that we are subject to its insurance licensing laws and must be licensed
      by Virginia to purchase policies from its residents. While we vigorously dispute
      Virginia’s claims, our litigation costs from the dispute are significant. An
      adverse outcome in Virginia would increase the costs of future compliance or
      result in a loss of business from Virginia, either of which could materially
      affect our business. An adverse outcome could encourage other states to make
      similar claims. Further, changes in laws or governmental regulation could affect
      our brokers or clients which could have a material adverse effect on our
      business.




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            Statements**




**Our
      Chairman and Chief Executive Officer Beneficially Owns 54% of Our Common Stock
      and, as a Result, Can Exercise Significant Influence over Our
      Company**




Mr.
      Brian
      D. Pardo, our Chairman and Chief Executive Officer, is defined under SEC
      regulations as the beneficial owner of approximately 54% of our common stock
      and
      exercises voting power by proxy from The Pardo Family Trust over 56% of the
      common stock (since we cannot vote the 188,433 sh ares
      held
      in our treasury). He will be able to control most matters requiring approval
      by
      our shareholders, including the election of directors and approval of
      significant corporate transactions. This concentration of ownership may also
      have the effect of delaying or preventing a change in control of Life Partners,
      which in turn could have a material adverse effect on the market price of our
      common stock or prevent our shareholders from realizing a premium over the
      market price for their shares of common stock.




**Our
      Stock Is Thinly Traded and the Stock Price May Be Volatile**




Our
      common stock is traded on the Nasdaq Small Cap market. The Nasdaq Small Cap
      market requires numerous qualitative standards such as minimum price at initial
      listing, minimum trading price for a 30-day period and adherence to numerous
      corporate governance requirements such as an independent audit committee. With
      an average daily volume of about 13,000 shares for the previous three months,
      our stock is not widely traded and our share prices may be volatile due to
      actual or anticipated variations in our quarterly operating results, positive
      or
      negative developments concerning our business, our industry or the general
      economy.




**Item
      2. Description of Property**




Our
      corporate offices are located at 204 Woodhew in Waco, Texas. We own 1.068 acres
      at this location and our offices occupy the entire 12,012 square foot office
      building, which was built on the lot in 1986.




**Item
      3. Legal Proceedings**




On
      May
      26, 2005, we filed an action in the United States District Court for the Eastern
      District of Virginia entitled *Life
      Partners, Inc. v. Miller et al.* Civil
      Action No. 3:05cv368. We filed the action to prevent Virginia’s enforcement of
      an insurance regulatory scheme that would require us to register as a settlement
      “provider” if we deal with a Virginia viator or life settlor. We sought
      injunctive relief and a declaration that Virginia’s scheme was an impermissible
      restraint on interstate commerce under the U.S. Constitution. We argued that
      we
      had no jurisdictional presence in Virginia and that Virginia’s registration,
      which is substantially identical to the Texas registration to which we are
      subject, imposed significant costs without a corresponding public benefit.
      On
      March 10, 2006, the U.S. District Court ruled in favor of the State of Virginia
      and against us. Because this ruling disposed of all questions before the trial
      court, we filed an appeal of the decision on March 14, 2006 with the U. S.
      Court of Appeals for the Fourth Circuit. That appeal is currently
      pending.




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            Statements**




We
      have
      previously prevailed in litigation involving similar issues with private
      litigants and we believe recent Supreme Court cases support our position.
      However, if we do not prevail in this action, other states might make similar
      claims resulting in significant increases in our regulatory costs or market
      limitations from avoided states. Although we intend to vigorously pursue this
      action and we believe we have a sound legal basis for our claims, we cannot
      guarantee the outcome of this action. If we are successful, we intend to seek
      an
      award of our attorney’s fees incurred in the prosecution of this
      action.




We
      are
      subject to legal proceedings in the ordinary course of business, none of which,
      either individually or collectively, we believe are material to our business
      operations, financial condition, or results of operations.




**Item
      4. Submission of Matters to a Vote of Security
      Holders**




No
      matter
      was submitted during the fourth quarter of the fiscal year covered by this
      Annual Report to a vote of our security holders.




**PART
      II**




**Item
      5. Market for Our Common Stock, Related Shareholder Matters and
      Our Purchases of Equity Securities**




*Market
      Information* .
      On May
      8, 2006, there were approximately 119 shareholders of record of our Common
      Stock. Most of our common stock is held beneficially by broker/dealers. We
      believe that there are approximately 926 beneficial owners of shares of our
      common stock who hold in street name through brokers.




The
      following table sets forth the high and low closing bid prices per share of
      our
      common stock for each full quarterly period during the two most recent fiscal
      years, as reported by the Nasdaq Small Cap Market.




**Cash****High**
            
            **Low**
            
            **Dividends****Year
              Ended 2/28/05**First
                Quarter
            
            $
            6.84
            
            $
            4.75
            
            $
            .03Second
                Quarter
            
            $
            5.80
            
            $
            3.56
            
            $
            .05Third
                Quarter
            
            $
            6.60
            
            $
            4.91
            
            $
            .06Fourth
                Quarter
            
            $
            8.65
            
            $
            4.93
            
            $
            .05**Year
                Ended 2/28/06**First
                Quarter
            
            $
            7.50
            
            $
            4.00
            
            $
            .05Second
                Quarter
            
            $
            5.21
            
            $
            3.96
            
            $
            .05Third
                Quarter
            
            $
            4.64
            
            $
            3.21
            
            $
            .05Fourth
                Quarter
            
            $
            6.50
            
            $
            4.60
            
            $
            .05






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            Statements**




On
      May
      23, 2006, the last reported sale price of our common stock on the Nasdaq was
      $5.57 per share. Our total share volume for April 2006 was approximately 176,200
      shares compared to 277,600 shares for the same period last year.




*Dividends* .
      We paid
      common stock dividends of $0.19 per share in fiscal 2005 and $0.20 per share
      in
      fiscal 2006. The dividend declared by the Board of Directors has been $0.05
      per
      share in each quarter since August 17, 2004.




**Item
      6. Management’s Discussion and
      Analysis**




Special
      Note: Certain statements set forth below under this caption constitute
“forward-looking statements” within the meaning of the Reform Act. See “Special
      Note Regarding Forward-Looking Statements” for additional factors relating to
      such statements.




We
      provide the following discussion to assist in understanding our financial
      position as of February 28, 2006, and results of operations for the years ended
      February 28, 2006 and 2005. As you read this discussion, refer to our
      Consolidated Statements of Income and our Consolidated Balance Sheet. We analyze
      and explain the differences between periods in the material line items of these
      statements.




**Critical
      Accounting Estimates, Assumptions and Policies**




Our
      discussion and analysis of financial condition and results of operations are
      based on our consolidated financial statements that were prepared in accordance
      with accounting principles generally accepted in the United States of America.
      To guide our preparation, we follow accounting policies, some of which represent
      critical accounting policies as defined by the SEC. The SEC defines critical
      accounting policies as those that are both most important to the portrayal
      of a
      company's financial condition and results and require management's most
      difficult, subjective, or complex judgment, often as a result of the need to
      make estimates about the effect of matters that are inherently uncertain and
      may
      change in subsequent periods. The making of estimates and assumptions when
      preparing financial statements is unavoidable. Areas affected by our estimates
      and assumptions are identified below.




We
      recognize income at the time a settlement closes and the purchaser has obligated
      itself to make the purchase. We defer $100 per viatical settlement and $200
      per
      life settlement to cover minor monitoring services provided subsequent to the
      settlement date. We amortize this deferred cost over the anticipated life
      expectancy of the insureds.




For
      life
      insurance policies purchased for our own account in fiscal years 2006 and 2005,
      we followed Financial Standards Board Technical Bulletin 85-4 *Accounting
      for Purchases of Life Insurance* (FTB
      85-4), which required that we reduce our investment in the policies to the
      cash
      surrender value of such policies with any differences between cost and cash
      surrender value being charged to expense.




On
      March
      27, 2006, FASB Staff Position No. FTB 85-4-1 *Accounting
      for Life Settlement Contracts by Third-Party Investors* (FSP FTB
      85-4-1) was issued, which amends FTB 85-4. The FASB Staff Position states that
      an investor may elect to account for its investments in life settlement
      contracts using either the investment method or the fair value method. The
      election shall be made on an instrument-by instrument basis and is irrevocable.
      Under the investment method, an investor shall recognize the initial investment
      at the purchase price plus all initial direct costs. Continuing costs (policy
      premiums and direct external costs, if any) to keep the policy in force shall
      be
      capitalized. Under the fair value method, an investor shall recognize the
      initial investment at the purchase price. In subsequent periods, the investor
      shall remeasure the investment at fair value in its entirety at each reporting
      period and shall recognize change in fair value earnings (or other performance
      indicators for entities that do not report earnings) in the period in which
      the
      changes occur.  FSP
      FTB
      85-4-1 is required to be applied to fiscal years beginning after June 15,
      2006. We have elected to adopt FSP FTB 85-4-1 as of March 1, 2006 (the beginning
      of fiscal 2007). We expect to value our investments in life settlement contracts
      using the investment method.




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We
      establish litigation and policy analysis loss reserves based on our best
      estimates as to the ultimate outcome of contingent liabilities. Because of
      the
      high degree of judgment required in determining these estimated reserve amounts,
      actual future litigation and policy analysis loss costs could differ from our
      currently estimated amounts.




We
      must
      make estimates of the collectability of accounts and notes receivable and
      premium advances.




We
      must
      evaluate property and equipment for impairment whenever indicators of impairment
      exist. Accounting standards require that if an impairment indicator is present,
      we must assess whether the carrying amount of the asset is unrecoverable by
      estimating the sum of the future cash flows expected to result from the asset,
      undiscounted and without interest charges. If the carrying amount is more than
      the recoverable amount, an impairment charge must be recognized, based on the
      fair value of the asset. As of February 28, 2006, we had recognized no
      impairment.




We
      must
      evaluate the useful lives of our property and equipment to assure that an
      adequate amount of depreciation is being charged to operations.




We
      are
      required to estimate our income taxes. This process involves estimating our
      current tax exposure together with assessing temporary differences resulting
      from differing treatment of items for tax and accounting purposes. These
      differences result in deferred tax assets and liabilities. We must then assess
      the likelihood that our deferred tax assets will be recovered from future
      taxable income, and, to the extent we believe that recovery is not likely,
      we
      must establish a valuation allowance. To the extent we establish a valuation
      allowance or increase this allowance in a period, we must include a tax
      provision or reduce our tax benefit in the statements of income. We use our
      judgment to determine our provision or benefit for income taxes, deferred tax
      assets and liabilities and any valuation allowance recorded against our net
      deferred tax assets.




We
      cannot
      predict what future laws and regulations might be passed that could have a
      material effect on our results of operations. We assess the impact of
      significant changes in laws and regulations on a regular basis and update the
      assumptions and estimates used to prepare our financial statements when we
      deem
      it necessary.




We
      have
      not made any material changes to our critical accounting estimates or
      assumptions or the judgments affecting the application of those estimates or
      assumptions. We discuss our significant accounting policies, including those
      policies that are not critical, in Note 2 of our Consolidated Financial
      Statements.




**New
      Accounting Pronouncements**




In
      December, 2004, the FASB issued FASB Statement No. 123 (revised 2004), *Share-Based
      Payment* .
      Statement 123(R) replaces FASB Statement No. 123, *Accounting
      for Stock-Based Compensation* ,
      supersedes APB Opinion No. 25, *Accounting
      for Stock Issued to Employees* and
      amends FASB Statement No. 95, *Statement
      of Cash Flows* .
      Statement 123(R) requires that all share-based payments to employees, including
      grants of employee stock options, be recognized in the financial statements
      based on their fair values. While the provisions of FAS 123(R) are not required
      for us until March 1, 2006, we have elected to apply the FAS 123(R) principles
      to stock options and other grants during this and all subsequent fiscal years.
      Since no options were granted, modified or settled during fiscal 2006, there
      was
      no stock-based compensation expense included in net income for the year ended
      February 28, 2006. Application of the FAS 123(R) principles to stock options
      and
      other grants during fiscal 2005 would have resulted in an additional $133,000
      in
      expense.




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            Statements**




In
      May
      2005, the FASB issued SFAS No. 154, *Accounting
      Changes and Error Corrections, a replacement of APB Opinion No. 20 and FASB
      Statement No. 3.* SFAS 154
      requires retrospective application to prior period financial statements for
      changes in accounting principle, unless it is impracticable to determine either
      the period-specific effects or the cumulative effect of the change.
      SFAS 154 also requires that retrospective application of a change in
      accounting principle be limited to the direct effects of the change. Indirect
      effects of a change in accounting principle should be recognized in the period
      of the accounting change. SFAS 154 is effective for accounting changes made
      in fiscal years beginning after December 15, 2005. The impact of SFAS 154
      will depend on the nature and extent of any voluntary accounting changes and
      correction of errors after the effective date, but we do not currently expect
      SFAS 154 to have a material impact on our financial statements.




In
      June
      2005, the EITF reached a consensus on Issue No. 04-10, *Determining
      Whether to Aggregate Operating Segments That Do Not Meet the Quantitative
      Thresholds* .
      EITF
      Issue 04-10 confirmed that operating segments that do not meet the quantitative
      thresholds can be aggregated only if aggregation is consistent with the
      objective and basic principles of SFAS 131, *Disclosure
      about Segments of an Enterprise and Related Information* .
      The
      consensus in this issue should be applied for fiscal years ending after
      September 30, 2005, and the corresponding information for earlier periods,
      including interim periods, should be restated unless it is impractical to do
      so.
      The adoption of EITF Issue 04-10 is not expected to have a material impact
      on our disclosures.




On
      March
      27, 2006, FASB Staff Position No. 85-4-1 *Accounting
      for Life Settlement Contracts by Third-Party Investors* (FSP FTB
      85-4-1) was issued. FSP FTB 85-4-1 states that an investor may elect to account
      for its investments in life settlement contracts using either the investment
      method or the fair value method. The election shall be made on an instrument-by
      instrument basis and is irrevocable. Under the investment method, an investor
      shall recognize the initial investment at the purchase price plus all initial
      direct costs. Continuing costs (policy premiums and direct external costs,
      if
      any) to keep the policy in force shall be capitalized. Under the fair value
      method, an investor shall recognize the initial investment at the purchase
      price. In subsequent periods, the investor shall remeasure the investment at
      fair value in its entirety at each reporting period and shall recognize change
      in fair value earnings (or other performance indicators for entities that do
      not
      report earnings) in the period in which the changes occur. FSP FTB 85-4-1 is
      required to be applied to fiscal years beginning after June 15, 2006. The
      adoption of FSP FTB 85-4-1 is expected to have a material impact on future
      disclosures. We have elected to adopt FSP FTB 85-4-1 as of March 1, 2006 (the
      beginning of fiscal 2007). We expect to value our investments in life settlement
      contracts using the investment method.




**Life
      Partners**




We
      are
      the oldest and one of the largest viatical and life settlement companies in
      the
      world. We are also the only publicly held viatical and life settlement company
      in the world. Our revenues are primarily derived from fees associated with
      facilitating viatical and life settlements.




**Comparison
      of Years Ended February 28, 2006, and 2005**




We
      had
      net income of $1,143,751 for the year ended February 28, 2006 (fiscal 2006),
      as
      compared to net income of $2,683,129 for the year ended February 28, 2005
      (fiscal 2005). This decrease in net income is attributable primarily to a 21%
      increase in brokerage fees and significant, but non-recurring legal and
      settlement expenses. Legal costs for fiscal 2006 were $1,545,149 compared to
      $236,974 in fiscal 2005. These costs were attributable primarily to our
      prosecution of a lawsuit against the State of Virginia. *See
      Item 3. Legal Proceedings.* This
      expense, while non-recurring, resulted in a substantial reduction in our net
      income for the year.




-17-
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            to Table of Contents**
 **Index
            to Financial
            Statements**




*Revenues* -
      Revenues increased by $1,337,555 or 7% from $18,746,098 in fiscal 2005 to
      $20,083,653 in fiscal 2006. This increase was due primarily to a 20% increase
      in
      the average revenue per settlement from $64,865 in fiscal 2005 to $77,543 in
      fiscal 2006.




The
      number of settlements we transacted this year decreased by 10% from last year.
      The decrease in numbers, however, was offset by an increase in total business
      volume (measured in face amount of policies transacted during the period),
      which
      was up 34% over fiscal 2005.




We
      believe the increasing demand for our services results from investment trends
      toward diversifying investment portfolios and avoiding economically sensitive
      investments. Returns on viatical and life settlements are linked to the lives
      of
      the insureds. As such, the settlements function independently from traditional
      equity and debt markets and commodity investments. As the oldest and one of
      the
      largest providers of viatical and life settlements, we benefit from these trends
      in the investing community. Demand for our services emanates from both domestic
      and international purchasers, and the ratio of domestic clients to international
      clients was relatively unchanged from last year. In fiscal 2006, approximately
      86% of our business was from domestic purchasers while approximately 13% was
      from foreign purchasers. In fiscal 2005, this ratio was 81% from domestic
      business and 19% from foreign business. We do not anticipate significant changes
      in the ratio between domestic and foreign business. During the past year, we
      completed purchases for a closed-end fund based in the Bahamas and we anticipate
      the launch of a second fund by the same fund managers during the 2006 calendar
      year.




*Brokerage
      and Referral Fees* -
      Brokerage and referral fees increased 21% or $2,018,831 from $9,579,779 in
      fiscal 2005 to $11,598,610 in fiscal 2006. Brokerage and referral fees
      constituted 57% of revenues in fiscal 2006 compared to 51% in fiscal 2005.
      The
      increase in brokerage and referral fees was due primarily to a 7% increase
      in
      revenues and higher face values of policies transacted.




Brokerage
      and referral fees generally increase or decrease with revenues, face values
      of
      policies transacted and the volume of transactions, although the exact ratio
      may
      vary according to a number of factors. Brokers may adjust their fees with the
      individual viators and life settlors whom they represent. In some instances,
      several brokers may compete for representation of the same seller, which will
      result in lower broker fees. Referral fees also vary depending on factors such
      as varying contractual obligations, market demand for a particular kind of
      policy or life expectancy category, individual agreements between clients and
      their referring financial planners. No broker fees are paid when a viator or
      life settlor is not represented by a broker and presents a policy to us
      directly.




*Expenses* -
      General and administrative expenses increased by 34% or $1,499,957 from
      $4,471,291 in fiscal 2005 to $5,971,248 in fiscal 2006.  Included in fiscal
      2006 general and administrative expenses are substantial non-recurring legal
      expenses of $1,545,149 associated with the prosecution of a legal action against
      the State of Virginia. *See
      Item 3. Legal Proceedings.* In
      unrelated legal actions, we experienced non-recurring settlement expenses of
      $388,808 in fiscal 2006 compared to $95,706 in fiscal 2005.




We
      made
      advances on policy premiums primarily to maintain certain older viatical
      settlement transactions. The contracts, most of which were made before 1998,
      allegedly lacked sufficient disclosure about the purchaser’s obligation to pay
      premiums in order to maintain an acquired policy. While we have steadfastly
      denied any legal liability or contractual obligation to do so, we have advanced
      premiums as an accommodation to some purchasers. Reimbursements for these
      premiums come from either the purchasers or from the distribution of such
      purchaser’s proceeds paid when the viator dies. Policy advances have been
      recorded as an expense at the time they are made with collections being treated
      as a reduction in this expense. During fiscal 2006 and 2005, we made premium
      advances of $1,185,929 and $820,599 respectively, and were reimbursed $283,084
      and $130,306, respectively. We are unable to estimate the amount of any future
      advances we may elect to make or the amount of reimbursements we are likely
      to
      receive. Because of our inability to estimate these amounts, we do not accrue
      amounts for future advances or reimbursements.




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            to Table of Contents**
 **Index
            to Financial
            Statements**




We
      also
      incurred $620,764 in policy acquisition expense associated with the purchase
      of
      policies for our own investment. P olicy
      acquisition expense resulted from the write-down of acquisition costs to the
      policies’ cash surrender values under the accounting treatment applied in fiscal
      2006. The FASB has amended the treatment used in fiscal 2006. As amended, the
      treatment would permit us to record acquired policies at the investment value
      (generally theirpurchase price) and avoid future write-downs. We also
      experienced gains related to the sale of policies for our own investment, which
      are discussed below under the heading *Investing
      and Financing Activities.*




Interest
      expense increased from $31,507 in fiscal 2005 to $138,063 in fiscal 2006, due
      to
      the additional line of credit and note payable during fiscal 2006.




*Income
      Taxes* -
      Income
      tax expense decreased by $501,769 from $1,340,500 in fiscal 2005 to $838,731
      in
      fiscal 2006 due to an increase in our deferred tax benefit, resulting from
      the
      premium advances we paid, and a 51% decrease in income before taxes.




**Liquidity
      and Capital Resources**




*Operating
      Activities* - Net
      cash flows provided by operating activities during fiscal 2006, were $1,184,725
      compared with net cash flows provided by operating activities of $2,037,356
      for
      fiscal 2005. This decrease in cash flows from operating activities was
      attributable primarily to a decrease in net income from $2,683,129 in fiscal
      2005 to $1,143,751 in fiscal 2006. Our accounts receivable decreased $288,033
      in
      fiscal 2006 compared with an increase of $510,404 in fiscal 2005. Accounts
      payable increased $289,016 in fiscal 2006 and $882,983 in fiscal 2005 and
      accrued liabilities increased $249,177 in fiscal 2006 compared with a decrease
      of $598,075 in fiscal 2005. Our cash during fiscal 2006 increased $684,950
      and
      decreased $2,071,868 in fiscal 2005.




*Investing
      and Financing Activities* - In
      fiscal 2006, our sources of net cash came principally from operations,
      $1,184,725, from loan proceeds, $2,291,018, and from proceeds on the sale of
      policies held for investment purposes, $1,651,208. We used the cash to make
      advances on policy premiums, to fund investing activities and to pay dividends.
      We used cash of $746,685 in investing activities in fiscal 2006. We placed
      $413,055 in income funds compared to $1,614,792 in fiscal 2005. The amounts
      invested in property and equipment in fiscal 2006, $145,006, was also
      lower than the $553,992 invested in fiscal 2005. These lower amounts were
      partially offset by the $663,344 in investment banking and related transaction
      costs we incurred in fiscal 2006 in connection with an institutional limited
      partnership for settlement acquisitions. We incurred no such fees in fiscal
      2005. We used additional cash to pay dividends of approximately $1.9 million
      in
      fiscal 2006, which maintained the prior dividend level. We also used $1,176,269
      to buy interests in policies for investment purposes and recognized proceeds
      of
      $1,651,208 from the sale of such policies.




Our
      present business model - in which we facilitate settlements, but generally
      do
      not buy for our own account - does not require large cash amounts. Our business
      model may change, however. We were successful in our effort to persuade the
      Financial Accounting Standards Board to review and revise the accounting
      treatment for purchases of life settlements. Under this new accounting
      treatment, a purchaser of life settlements may record the value of the life
      settlement using either the investment method (the initial purchase price and
      capitalization of premiums and other continuing costs) or the fair value method
      (the initial purchase price and remeasured on a fair value basis at each
      reporting period). Prior accounting rules required the purchaser to write down
      the initial purchase price to the cash surrender value of the underlying
      policies, which was typically much less than the initial purchase price. Because
      of this favorable accounting change, we may alter our cash usage to purchase
      more policies for our own investment purposes.




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            to Table of Contents**
 **Index
            to Financial
            Statements**




We
      are
      also expanding our services to accommodate the investment strategies and
      transaction structuring goals of institutional investors. We have already been
      retained as a fund advisor and anticipate expanding these services in
      combination with our current life settlement provider services. In addition
      to
      our compensation for our policy acquisition services, we would receive annual
      fees for our management services and may participate in revenue sharing, equity
      or other compensation structures. Our participation in these funds would result
      in the accrual of an interest in policies held for investment purposes. We
      have
      participated as a limited partner in forming one such fund, but the general
      partner has not yet authorized the purchase of any settlements.




Our
      financial strategy is to increase cash flows generated from operations by
      increasing revenues while controlling brokerage and general and administrative
      expenses. We believe that domestic and international demand for both viatical
      and life settlements will continue to grow during the next year, especially
      as
      the prospects for economic conditions remain uncertain. In response to the
      projected demand for qualified viatical and life settlement policies, we are
      increasing our advertising and educational awareness to potential sellers of
      policies and will continue to expand our marketing efforts to purchasers of
      life
      settlements with a special focus on institutional purchasers.




*Capital
      Resources and Other Assets* - On
      February 28, 2006, we had working capital of $2,043,251. We believe future
      viatical and life settlement operations will generate sufficient profits and
      cash flows to meet our anticipated working capital needs. Services related
      to
      life settlements are currently marketed and performed in a manner similar to
      viatical settlements, although primarily to institutional purchasers.




In
      fiscal
      2005, we acquired a woolly mammoth specimen and related artifacts from Russia.
      The woolly mammoth and artifacts are presented in a museum-quality display
      at
      our corporate headquarters, where we encourage educational tours. We view our
      collection as a promotional tool to build community awareness and publicity.
      We
      believe a strong community presence promotes better employee relations and
      better relations with the stakeholders with whom we do business. At this point,
      we think the collection is well-suited for its purposes and do not anticipate
      further capital expenditures or expense to expand the collection.




**Off-Balance
      Sheet Arrangements**




We
      do not
      engage in any off-balance sheet arrangements or transactions.




**Contractual
      Obligations and Commitments**




The
      following table reflects our outstanding contractual obligations and commitments
      as of February 28, 2006:


**Contractual
                Obligations**
            
            **Total**
            
            **Due
                in less**
              **than
                1 year**
            
            **Due
                in**
              **1
                to 3 years**
            
            **Due
                in**
              **4
                to 5 years**
            
            **Due
                after**
              **5
                years**Line
                of Credit
            
            $
            1,891,018
            
            $
            1,891,018
            
            $
            —
            
            $
            —
            
            $
            —Long-term
                debt
            
            
            454,245
            
            
            50,997
            
            
            110,995
            
            
            124,178
            
            
            168,075Artifacts
            
            
            100,000
            
            
            100,000
            
            
            —
            
            
            —
            
            
            —Operating
                leases
            
            
            62,346
            
            
            36,675
            
            
            25,671
            
            
            —
            
            
            —Note
                Payable
            
            
            400,000
            
            
            —
            
            
            400,000
            
            
            —
            
            
            —Total
                obligations
            
            $
            2,907,609
            
            $
            2,078,690
            
            $
            536,665
            
            $
            124,178
            
            $
            168,075






-20-
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            to Table of Contents**
 **Index
            to Financial
            Statements**




**Item
      7. Financial Statements**




Our
      audited Consolidated Financial Statements, together with the report of auditors
      and the notes to the Consolidated Financial Statements, begin on page 24 of
      this
      report.




**Item
      8. Changes in and Disagreements with Accountants on
      Accounting****and Financial Disclosure**




None.




**Item
      8A. Controls and Procedures**




As
      required by Rule 13a-15 under the Securities Exchange Act of 1934, as of the
      filing date of this report, we carried out an evaluation of the effectiveness
      of
      the design and operation of our disclosure controls and procedures. This
      evaluation was carried out under the supervision and with the participation
      of
      our principal executive officer and our principal financial officer, who
      concluded that our disclosure controls and procedures are effective. There
      have
      been no significant changes in our internal controls or in other factors, which
      could significantly affect internal controls subsequent to the date we carried
      out our evaluation.




Disclosure
      controls and procedures are controls and other procedures that are designed
      to
      ensure that information required to be disclosed in our reports filed or
      submitted under the Securities Exchange Act is recorded, processed, summarized
      and reported, within the time periods specified in the Securities and Exchange
      Commission's rules and forms. Disclosure controls and procedures include,
      without limitation, controls and procedures designed to ensure that information
      required to be disclosed in our reports filed under the Exchange Act is
      accumulated and communicated to management, including our principal executive
      officer and our principal financial officer, as appropriate, to allow timely
      decisions regarding required disclosure.




**Item
      8B. Other Information**




None.




**PART
      III**




**Item
      9. Directors and Executive Officers**




The
      information required in response to this Item is incorporated herein by
      reference to our proxy statement to be filed with the Securities and Exchange
      Commission pursuant to Regulation 14A, not later than 120 days after the end
      of
      the fiscal year covered by this report.




-21-
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            Statements**




**Item
      10. Executive Compensation**




The
      information required in response to this Item is incorporated herein by
      reference to our proxy statement to be filed with the Securities and Exchange
      Commission pursuant to Regulation 14A, not later than 120 days after the end
      of
      the fiscal year covered by this report.




**Item
      11. Security Ownership of Certain Beneficial Owners and
      Management and Related Shareholder Matters**




The
      information required in response to this Item is incorporated herein by
      reference to our proxy statement to be filed with the Securities and Exchange
      Commission pursuant to Regulation 14A, not later than 120 days after the end
      of
      the fiscal year covered by this report.




**Item
      12. Certain Relationships and Related
      Transactions**




The
      information required in response to this Item is incorporated herein by
      reference to our proxy statement to be filed with the Securities and Exchange
      Commission pursuant to Regulation 14A, not later than 120 days after the end
      of
      the fiscal year covered by this report.




**Item
      13. Exhibits**




The
      exhibit list and accompanying footnote disclosures in the Index to Exhibits
      immediately following the Notes to our Consolidated Financial Statements is
      incorporated herein by reference in response to the requirements of this part
      of
      the report.




**Item
      14. Principal Accountant Fees and
      Services**




The
      information required in response to this Item is incorporated herein by
      reference to our proxy
      statement to be filed with the Securities and Exchange Commission pursuant
      to
      Regulation 14A, not later than 120 days after the end of the fiscal year covered
      by this report.




-22-
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            Statements**





**SIGNATURES**




In
      accordance with Section 13 or 15(d) of the Exchange Act, the registrant caused
      this report to be signed on its behalf by the undersigned, thereunto duly
      authorized.




**LIFE
              PARTNERS HOLDINGS, INC.**Date: 
May
              26, 2006
            By:
            /s/ Brian
              D.
              PardoName:  
                Brian D. Pardo
              Title:    
                President and Chief Executive
                Officer




In
      accordance with the Exchange Act, this report has been signed below by the
      following persons on behalf of the registrant and in the capacities and on
      the
      dates indicated.




**Name**
            
            **Title**
            
            **Date**/s/
                Brian D. Pardo
            
            President,
                Principal Executive Officer, and Director
            
            May
                26, 2006Brian
                D. Pardo/s/
                Nina
                Piper
            
            Treasurer
            
            May
                26, 2006Nina
                Piper/s/
                R. Scott
                Peden
            
            Secretary,
                Director
            
            May
                26, 2006R.
                Scott Peden/s/Tad
                Ballantyne
            
            Director
            
            May
                26, 2006Tad
                Ballantyne/s/
                Harry
                Goodall
            
            Director
            
            May
                26, 2006Lt.
                Gen. Harry Goodall/s/
                Fred Dewald
            
            Director
            
            May
                26, 2006Fred
                Dewald






-23-
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 **Index
            to Financial
            Statements**





**LIFE
      PARTNERS HOLDINGS, INC.**


**CONSOLIDATED
      FINANCIAL STATEMENTS**


**FEBRUARY
      28, 2006 AND FEBRUARY 28, 2005**





**Contents**


Report
                  of Independent Registered Public Accounting
                  Firm
              25Audited
                  Consolidated Financial Statements:Consolidated
                  Balance Sheet
              26Consolidated
                  Statements of Income
              28Consolidated
                  Statements of Shareholders’
                  Equity
              29Consolidated
                  Statements of Cash Flows
              30Notes
                  to Consolidated Financial
                  Statements
              31




-24-
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            to Financial
            Statements**




**REPORT
      OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING
      FIRM**








To
      the
      Board of Directors


Life
      Partners Holdings, Inc.







We
      have
      audited the accompanying consolidated balance sheet of LIFE PARTNERS HOLDINGS,
      INC. and subsidiaries as of February 28, 2006, and the related consolidated
      statements of income, shareholders' equity, and cash flows for the years ended
      February 28, 2006 and 2005. These consolidated financial statements are the
      responsibility of the Company’s management. Our responsibility is to express an
      opinion on these financial statements based on our audits.




We
      conducted our audits in accordance with the standards of the Public Company
      Accounting Oversight Board (United States). Those standards require that we
      plan
      and perform the audit to obtain reasonable assurance about whether the
      consolidated financial statements are free of material misstatement. The Company
      is not required to have, nor were we engaged to perform, an audit of its
      internal control over financial reporting. Our audit included consideration
      of
      internal control over financial reporting as a basis for designing audit
      procedures that are appropriate in the circumstances, but not for the purpose
      of
      expressing an opinion on the effectiveness of the Company’s internal control
      over financial reporting. Accordingly, we express no such opinion. An audit
      also
      includes examining, on a test basis, evidence supporting the amounts and
      disclosures in the consolidated financial statements, assessing the accounting
      principles used and significant estimates made by management, as well as
      evaluating the overall financial statement presentation. We believe that our
      audits provide a reasonable basis for our
      opinion.




In
      our
      opinion, the consolidated financial statements referred to in the first
      paragraph above present fairly, in all material respects, the consolidated
      financial position of Life Partners Holdings, Inc. and subsidiaries as of
      February 28, 2006, and the consolidated results of its operations and cash
      flows
      for the years ended February 28, 2006 and 2005, in conformity with accounting
      principles generally accepted in the United States of America.







/s/
      MURRELL, HALL, MCINTOSH & CO., PLLP




Oklahoma
      City, Oklahoma




May
      4,
      2006




-25-
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 **Index
            to Financial
            Statements**




**LIFE
                PARTNERS HOLDINGS, INC.****CONSOLIDATED
                BALANCE SHEET****FEBRUARY
                28, 2006****Page
                1 of 2**


ASSETSCURRENT
                  ASSETS:Cash
              
              $
              1,787,239Investment
                  in securities
              
              
              3,715,678Accounts
                  receivable - trade
              
              
              2,145,501Accounts
                  receivable - employees and others
              
              
              96,494Prepaid
                  expenses
              
              
              257,532Total
                  current assets
              
              
              8,002,444PROPERTY
                  AND EQUIPMENT:Land
                  and building
              
              
              954,103Proprietary
                  software
              
              
              349,112Machinery
                  and equipment
              
              
              675,709Transportation
                  equipment
              
              
              135,5002,114,424Accumulated
                  depreciation
              
              
              (676,013
              )1,438,411OTHER
                  ASSETS:Premium
                  advances net of reserve for uncollectible of $2,511,062
              
              
              —Investments
                  in policies
              
              
              6,144Other
              
              
              721,700Investment
                  in partnership
              
              
              663,344Deferred
                  income taxes
              
              
              1,165,0002,556,188Total
                  Assets
              
              $
              11,997,043






See
      the
      accompanying summary of accounting policies and notes to the financial
      statements.




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 **Index
            to Financial
            Statements**




**LIFE
                PARTNERS HOLDINGS, INC.****CONSOLIDATED
                BALANCE SHEET****FEBRUARY
                28, 2006****Page
                2 of 2**




LIABILITIES
                AND SHAREHOLDERS' EQUITYCURRENT
                LIABILITIES:Accounts
                payable
            
            
            2,270,250Accrued
                liabilities - contingencies and other
            
            
            1,284,969Current
                portion of long-term debt
            
            
            150,997Short-term
                notes payable
            
            
            1,891,018Deferred
                revenue
            
            
            245,000Income
                taxes payable
            
            $
            116,959Total
                current liabilities
            
            
            5,959,193LONG-TERM
                DEBT, net of current portion shown above
            
            
            803,248SHAREHOLDERS'
                EQUITY:Common
                stock, $0.01 par value 10,000,000 sharesauthorized;
                9,615,586 shares issued and outstanding
            
            
            96,156Additional
                paid-in capital
            
            
            10,608,398Accumulated
                deficit
            
            
            (4,856,351
            )Accumulated
                other comprehensive loss
            
            
            (241,460
            )Less:
                Notes receivable issued for common stock
            
            
            (372,141
            )Less:
                Treasury stock - 188,433 shares
            
            
            —Total
                shareholders' equity
            
            
            5,234,602Total
                Liabilities and Shareholders' Equity
            
            $
            11,997,043


See
        the
        accompanying summary of accounting policies and notes to the financial
        statements.
  -27-
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 **Index
              to Financial
              Statements**





**LIFE
      PARTNERS HOLDINGS, INC.**


**CONSOLIDATED
      STATEMENTS OF INCOME**


**FOR
      THE YEARS ENDED FEBRUARY 28, 2006 AND 2005**


**2006**
            
            **2005**REVENUES
            
            $
            20,083,653
            
            $
            18,746,098BROKERAGE
                AND REFERRAL FEES
            
            
            11,598,610
            
            
            9,579,779REVENUES,
                NET OF BROKERAGE FEES
            
            
            8,485,043
            
            
            9,166,319OPERATING
                AND ADMINISTRATIVE EXPENSES:General
                and administrative
            
            
            5,971,248
            
            
            4,471,291Settlement
                costs and other
            
            
            388,808
            
            
            95,706Depreciation
                and amortization
            
            
            213,382
            
            
            161,9006,573,438
            
            
            4,728,897INCOME
                FROM OPERATIONS
            
            
            1,911,605
            
            
            4,437,422OTHER
                INCOME (EXPENSES):Interest
                and other income
            
            
            671,152
            
            
            392,031Interest
                expense
            
            
            (138,063
            )
            
            (31,507
            )Premium
                advances, net
            
            
            (902,845
            )
            
            (690,293
            )Policy
                acquisition expense
            
            
            (620,764
            )
            
            (5,261
            )Gain
                on sale of policies for investment purposes
            
            
            1,100,967
            
            
            —Realized
                (loss) on investments
            
            
            (39,570
            )
            
            (78,763
            )70,877
            
            
            (413,793
            )INCOME
                BEFORE INCOME TAXES
            
            
            1,982,482
            
            
            4,023,629INCOME
                TAXES:Current
                tax expense
            
            
            1,186,731
            
            
            1,541,500Deferred
                tax benefit
            
            
            (348,000
            )
            
            (201,000
            )838,731
            
            
            1,340,500NET
                INCOME
            
            $
            1,143,751
            
            $
            2,683,129EARNINGS
                PER SHARE:Basic
            
            $
            0.12
            
            $
            0.28Diluted
            
            $
            0.12
            
            $
            0.28AVERAGE
                COMMON AND COMMONEQUIVALENT
                SHARES OUTSTANDING: Basic and Diluted
            
            
            9,409,102
            
            
            9,443,865THE
                COMPONENTS OF COMPREHENSIVE INCOME:Net
                income
            
            $
            1,143,751
            
            $
            2,683,129Unrealized
                gain (loss) on investment securities
            
            
            (228,226
            )
            
            10,262COMPREHENSIVE
                INCOME
            
            $
            915,525
            
            $
            2,693,391BASIC
                AND DILUTED EARNINGS PER SHARE: Comprehensive income
            
            $
            0.10
            
            $
            0.29


See
        the
        accompanying summary of accounting policies and notes to the financial
        statements.
  -28-
 **Back
              to Table of Contents**
 **Index
              to Financial
              Statements**





**LIFE
      PARTNERS HOLDINGS, INC.**


**CONSOLIDATED
      STATEMENTS OF SHAREHOLDERS'
      EQUITY**


**FOR
      THE YEARS ENDED FEBRUARY 28, 2006 AND 2005**




**Common
                      Stock**
                  
                  **Treasury
                      Stock****Number
                      of**
                    **Shares**
                  
                  **$0.01**
                    **par**
                    **Value**
                  
                  **Additional**
                    **Paid-In**
                    **Capital**
                  
                  **Accumulated**
                    **Deficit**
                  
                  **Accumulated**
                    **Other**
                    **Comprehensive**
                    **Loss**
                  
                  **Note**
                    **Receivable**
                  
                  **Number
                      of**
                    **Shares**
                  
                  **Amount**
                  
                  **Total**
                    **Shareholders’**
                    **Equity**Balance,February
                      29, 2004
                  
                  
                  9,711,400
                  
                  $
                  97,114
                  
                  $
                  10,327,540
                  
                  $
                  (4,948,719
                  )
                  $
                  (23,496
                  )
                  $
                  (478,431
                  )
                  
                  236,615
                  
                  $
                  —
                  
                  $
                  4,974,008Dividends
                      declared
                  
                  
                  —
                  
                  
                  —
                  
                  
                  —
                  
                  
                  (1,838,270
                  )
                  
                  —
                  
                  
                  —
                  
                  
                  —
                  
                  
                  —
                  
                  
                  (1,838,270
                  )Options
                      exercised
                  
                  
                  65,000
                  
                  
                  650
                  
                  
                  359,050
                  
                  
                  —
                  
                  
                  —
                  
                  
                  —
                  
                  
                  (30,000
                  )
                  
                  —
                  
                  
                  359,700Options
                      issued
                  
                  
                  
                  
                  
                  
                  
                  
                  75,000
                  
                  
                  
                  
                  
                  —
                  
                  
                  
                  
                  
                  —
                  
                  
                  —
                  
                  
                  75,000Shares
                      returned to the treasury
                  
                  
                  (160,814
                  )
                  
                  (1,608
                  )
                  
                  (153,192
                  )
                  
                  —
                  
                  
                  —
                  
                  
                  154,800
                  
                  
                  —
                  
                  
                  —
                  
                  
                  —Other
                      comprehensive
                  
                  
                  —
                  
                  
                  —
                  
                  
                  —
                  
                  
                  —
                  
                  
                  10,262
                  
                  
                  —
                  
                  
                  —
                  
                  
                  —
                  
                  
                  10,262Net
                      income for the year ended
                  
                  
                  —
                  
                  
                  —
                  
                  
                  —
                  
                  
                  —
                  
                  
                  —
                  
                  
                  —
                  
                  
                  —
                  
                  
                  —
                  
                  
                  —February
                      28, 2005
                  
                  
                  —
                  
                  
                  —
                  
                  
                  —
                  
                  
                  2,683,129
                  
                  
                  —
                  
                  
                  —
                  
                  
                  —
                  
                  
                  —
                  
                  
                  2,683,129Balance,February
                      28, 2005
                  
                  
                  9,615,586
                  
                  
                  96,156
                  
                  
                  10,608,398
                  
                  
                  (4,103,860
                  )
                  
                  (13,234
                  )
                  
                  (323,631
                  )
                  
                  206,615
                  
                  
                  —
                  
                  
                  6,263,829Dividends
                      declared
                  
                  
                  —
                  
                  
                  —
                  
                  
                  —
                  
                  
                  (1,896,242
                  )
                  
                  —
                  
                  
                  —
                  
                  
                  —
                  
                  
                  —
                  
                  
                  (1,896,242
                  )Other
                      comprehensive loss
                  
                  
                  —
                  
                  
                  —
                  
                  
                  —
                  
                  
                  —
                  
                  
                  (228,226
                  )
                  
                  —
                  
                  
                  —
                  
                  
                  —
                  
                  
                  (228,226
                  )Note
                      for stock accrued interest
                  
                  
                  —
                  
                  
                  —
                  
                  
                  —
                  
                  
                  —
                  
                  
                  —
                  
                  
                  (48,510
                  )
                  
                  —
                  
                  
                  —
                  
                  
                  (48,510
                  )Shares
                      returned to officer
                  
                  
                  —
                  
                  
                  —
                  
                  
                  —
                  
                  
                  —
                  
                  
                  —
                  
                  
                  —
                  
                  
                  (18,182
                  )
                  
                  —
                  
                  
                  —Net
                      income for the year ended
                  
                  
                  
                  
                  
                  —
                  
                  
                  —
                  
                  
                  —
                  
                  
                  —
                  
                  
                  —
                  
                  
                  —
                  
                  
                  —
                  
                  
                  —February
                      28, 2006
                  
                  
                  —
                  
                  
                  —
                  
                  
                  —
                  
                  
                  1,143,751
                  
                  
                  —
                  
                  
                  —
                  
                  
                  —
                  
                  
                  —
                  
                  
                  1,143,751Balance,February
                      28, 2006
                  
                  
                  9,615,586
                  
                  $
                  96,156
                  
                  $
                  10,608,398
                  
                  $
                  (4,856,351
                  )
                  $
                  (241,460
                  )
                  $
                  (372,141
                  )
                  
                  188,433
                  
                  $
                  —
                  
                  $
                  5,234,602






See
      the
      accompanying summary of accounting policies and notes to the financial
      statements.


-29-
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              to Table of Contents**
 **Index
              to Financial
              Statements**





**LIFE
      PARTNERS HOLDINGS, INC.**


**CONSOLIDATED
      STATEMENTS OF CASH FLOWS**


**FOR
      THE YEARS ENDED FEBRUARY 28, 2006 AND 2005**





**2006**
            
            **2005**CASH
                FLOWS FROM OPERATING ACTIVITIES:Net
                income
            
            $
            1,143,751
            
            $
            2,683,129Adjustments
                to reconcile net income to operating activities-Depreciation
                and amortization
            
            
            213,382
            
            
            161,901Policy
                acquisition expense
            
            
            620,764
            
            
            —Gain
                on sale of policies for investment purposes
            
            
            (1,100,967
            )
            
            —Stock
                options issued for services
            
            
            —
            
            
            75,000(Increase)
                decrease in operating assets:Accounts
                receivable
            
            
            288,033
            
            
            (510,404
            )Prepaid
                expenses
            
            
            (240,496
            )
            
            15,568Deferred
                income taxes
            
            
            (348,000
            )
            
            (201,000
            )Increase
                (decrease) in operating liabilities:Accounts
                payable
            
            
            289,016
            
            
            882,982Accrued
                liabilities
            
            
            249,177
            
            
            (598,075
            )Income
                taxes payable
            
            
            3,715
            
            
            (481,995
            )Deferred
                revenue
            
            
            66,350
            
            
            10,250Net
                cash provided by operating activities
            
            
            1,184,725
            
            
            2,037,356CASH
                FLOWS FROM INVESTING ACTIVITIES:Investment
                in income funds
            
            
            (413,055
            )
            
            (1,614,792
            )Purchases
                of property and equipment
            
            
            (145,006
            )
            
            (553,992
            )Purchases
                of policies for investment purposes
            
            
            (1,176,269
            )
            
            —Proceeds
                from sale of policies for investment purposes
            
            
            1,651,208
            
            
            —Purchases
                of artifacts and other
            
            
            (219
            )
            
            (415,404
            )Investment
                in partnership
            
            
            (663,344
            )
            
            —Net
                cash used in investing activities
            
            
            (746,685
            )
            
            (2,584,188
            )CASH
                FLOWS FROM FINANCING ACTIVITIES:Payments
                on notes payable
            
            
            (147,866
            )
            
            (96,466
            )Proceeds
                from notes payable
            
            
            2,291,018
            
            
            50,000Stock
                options exercised
            
            
            —
            
            
            359,700Dividends
            
            
            (1,896,242
            )
            
            (1,838,270
            )Net
                cash provided by (used in) financing activities
            
            
            246,910
            
            
            (1,525,036
            )NET
                INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
            
            
            684,950
            
            
            (2,071,868
            )CASH
                AND CASH EQUIVALENTS, BEGINNING OF PERIOD
            
            
            1,102,289
            
            
            3,174,157CASH
                AND CASH EQUIVALENTS, END OF PERIOD
            
            $
            1,787,239
            
            $
            1,102,289SUPPLEMENTAL
                DISCLOSURES OF CASH FLOW INFORMATION:Interest
                paid, net of capitalized amounts
            
            $
            94,084
            
            $
            31,507Income
                taxes paid
            
            $
            1,070,581
            
            $
            1,360,500SUPPLEMENTAL
              DISCLOSURES OF NON-CASH ITEMS:Unrealized
                gains (loss) on marketable securities
            
            $
            (228,226
            )
            $
            10,262


See
        the
        accompanying summary of accounting policies and notes to the financial
        statements.
  -30-
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              to Table of Contents**
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              Statements**





**(1)
      DESCRIPTION OF BUSINESS**




Life
      Partners Holdings, Inc. ("we” or “Life Partners”) is a Texas corporation engaged
      in facilitating viatical and life settlement transfers. We are the
      parent company of Life Partners, Inc. (“LPI”), which is the oldest and one of
      the largest viatical settlement companies in the United States. Viatical and
      life settlements involve the purchase
      of the life insurance policies of terminally ill persons (viatical settlements)
      or elderly persons (life settlements) at a discount to their face value.




**(2)
      SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES**




The
      following is a summary of significant accounting policies followed by Life
      Partners:




Certain
      2005 amounts have been reclassified to conform to current period presentation.
      These reclassifications have no effect on previously reported net income.




Cash
      and
      Cash Equivalents - For purposes of the statement of cash flows, we consider
      all
      short-term debt securities purchased with a maturity of three months or less
      to
      be cash equivalents. The average balance of our general checking account balance
      is generally in excess of $100,000. The Federal Deposit Insurance Corporation
      insures all bank accounts up to $100,000. Management believes its exposure
      to
      loss is minimal considering only the amounts in excess of $100,000 are at risk
      and the depository bank is a well established national bank and one of the
      nation's largest financial institutions.




Premium
      Advances - We follow the practice of fully reserving all premium advances at
      the
      time such advances are made. When premium advances are repaid, the repayments
      are offset against the premium expense. During the fiscal years ended February
      28, 2006 and 2005 we advanced premiums totaling $1,185,929 and $820,599,
      respectively, and received repayments of advances of $283,083 and $130,306,
      respectively.




Consolidation
      - The consolidated financial statements include the accounts of Life Partners
      and its wholly owned subsidiaries, as described in Note 1 above. All significant
      inter-company accounts and transactions have been eliminated in consolidation.




Revenue
      Recognition - We recognize income at the time a settlement has been closed
      and
      the purchaser has obligated itself to make the purchase. We defer $100 per
      viatical settlement and $200 per life settlement to cover minor monitoring
      services provided subsequent to the settlement date and to amortize this
      deferred cost over the anticipated life expectancy of the insureds.




Investment
      in Life Insurance Policies - For fiscal 2006 and prior fiscal years, in
      accordance with Financial Standards Board Technical Bulletin 85-4 *Accounting
      for Purchases of Life Insurance* (FTB
      85-4), we reduced our investment in life insurance policies to their cash
      surrender value with any differences between cost and cash surrender value
      being
      charged to expense. At February 28, 2006, we held investments in 25 life
      insurance policies with face value amounts totaling $636,396, which have been
      reduced to the carrying value of $6,144.




On
      March
      27, 2006, the FASB Staff Position No. FTB 85-4-1 *Accounting
      for Life Settlement Contracts by Third-Party Investors* (FSP FTB
      85-4-1) was issued, which amended FTB 85-4. FSP FTB 85-4-1 states that an
      investor may elect to account for its investments in life settlement contracts
      using either the investment method or the fair value method. The election shall
      be made on an instrument-by instrument basis and is irrevocable. Under the
      investment method, an investor shall recognize the initial investment at the
      purchase price plus all initial direct costs. Continuing costs (policy premiums
      and direct external costs, if any) to keep the policy in force shall be
      capitalized. Under the fair value method, an investor shall recognize the
      initial investment at the purchase price. In subsequent periods, the investor
      shall remeasure the investment at fair value in its entirety at each reporting
      period and shall recognize change in fair value earnings (or other performance
      indicators for entities that do not report earnings) in the period in which
      the
      changes occur.  FSP
      FTB
      85-4-1 is required to be applied to fiscal years beginning after June 15, 2006.
      We have elected to adopt FSP FTB 85-4-1 as of March 1, 2006 (the beginning
      of
      fiscal 2007). The adoption of FSP FTB 85-4-1 is expected to have a material
      impact on future disclosures. We expect to value our investments in life
      settlement contracts using the investment method.




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            Statements**




Property
      and Equipment - Our property and equipment are depreciated over their useful
      lives using the straight-line method. The useful lives of property and equipment
      for purposes of computing depreciation are:


Building
            30
                yearsMachinery
                and equipment
            5
                yearsTransportation
                equipment
            5
                to 9 years




Artifacts
      and Other - The artifacts and other assets are stated at cost. We have evaluated
      these assets and believe there is no impairment in their value as of February
      28, 2006.




Impairment
      of Long-lived Assets - We account for the impairment and disposition of
      long-lived assets in accordance with SFAS No. 121, *Accounting
      for the Impairment of Long-lived Assets to be Disposed of* (FAS
      121). In accordance with FAS 121, long-lived assets to be held are reviewed
      for
      events or changes in circumstances, which indicate that their carrying value
      may
      not be recoverable. As of February 28, 2006, no impairment has been indicated.




Income
      Taxes - Timing differences between the reporting of income and expenses for
      financial and income tax reporting purposes are reported as deferred tax assets,
      net of valuation allowances, or as deferred tax liabilities depending on the
      cumulative effect of all timing differences. See Note 7 for further details.




Use
      of
      Estimates - The preparation of financial statements in conformity with generally
      accepted accounting principles requires management to make estimates and
      assumptions that affect the amounts reported and contingent assets and
      liabilities disclosed in the financial statements and accompanying notes. Actual
      results inevitably will differ from those estimates and such differences may
      be
      material to the financial statements.




Earnings
      Per Share - Basic earnings (loss) per share computations are calculated on
      the
      weighted-average of common shares and common share equivalents outstanding
      during the year, reduced by the treasury stock. Common stock options and
      warrants are considered to be common share equivalents and are used to calculate
      diluted earnings per common and common share equivalents except when they are
      anti-dilutive.




Concentrations
      of Credit Risk and Major Customers - In fiscal 2006, compensation to two
      licensees comprised 44% of all brokerage and referral fees compared to
      compensation to a single licensee which constituted 38% of all brokerage and
      referral fees in fiscal 2005.  Compensation
      to two brokers in fiscal 2006 comprised 27% of all brokerage and referral fees
      compared to compensation to a single broker which constituted 25% of all
      brokerage and referral fees in fiscal 2005.




**(3)
      NEW ACCOUNTING PRONOUNCEMENTS**




In
      November 2004, the FASB issued SFAS No. 151 *Inventory
      Costs - an amendment of ARB No. 43, Chapter 4* .
      Statement No. 151 requires that certain abnormal costs associated with the
      manufacturing, freight, and handling costs associated with inventory be charged
      to current operations in the period in which they are incurred. The adoption
      of
      SFAS 151 had no impact on our financial position, results of operations, or
      cash
      flows.




-32-
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            Statements**




In
      December 2004, the FASB issued FASB Statement No. 123 (revised 2004), *Share-Based
      Payment* .
      Statement 123(R) replaces FASB Statement No. 123, *Accounting
      for Stock-Based Compensation* ,
      supersedes APB Opinion No. 25, *Accounting
      for Stock Issued to Employees* and
      amends FASB Statement No. 95, *Statement
      of Cash Flows* .
      Statement 123(R) requires that all share-based payments to employees, including
      grants of employee stock options, be recognized in the financial statements
      based on their fair values. While the provisions of FAS 123(R) are not required
      for us until March 1, 2006, we have elected to apply the FAS 123(R) principles
      to stock options and other grants during fiscal 2006 and all subsequent fiscal
      years. Since no options were granted, modified or settled during fiscal 2006,
      there was no stock-based compensation expense included in net income for the
      year ended February 28, 2006. Application of the FAS 123(R) principles to stock
      options and other grants during fiscal 2005 would have resulted in an additional
      $133,000 in expense.




In
      December 2004, the FASB issued SFAS No. 153, *Exchanges
      of Nonmonetary Assets-amendment of APB Opinion No. 29* . Statement
      153 eliminates the exception to fair value for exchanges of similar productive
      assets and replaces it with a general exception for exchange transactions that
      do not have commercial substance, defined as transactions that are not expected
      to result in significant changes in the cash flows of the reporting entity.
      This
      statement is effective for exchanges of nonmonetary assets occurring after
      June 15, 2005.




In
      May
      2005, the FASB issued SFAS No. 154, *Accounting
      Changes and Error Corrections, a replacement of APB Opinion No. 20 and FASB
      Statement No. 3.* SFAS 154
      requires retrospective application to prior period financial statements for
      changes in accounting principle, unless it is impracticable to determine either
      the period-specific effects or the cumulative effect of the change.
      SFAS 154 also requires that retrospective application of a change in
      accounting principle be limited to the direct effects of the change. Indirect
      effects of a change in accounting principle should be recognized in the period
      of the accounting change. SFAS 154 is effective for accounting changes made
      in fiscal years beginning after December 15, 2005. The impact of SFAS 154
      will depend on the nature and extent of any voluntary accounting changes and
      correction of errors after the effective date, but we do not currently expect
      SFAS 154 to have a material impact on our financial statements.




In
      June
      2005, the EITF reached a consensus on Issue No. 04-10, *Determining
      Whether to Aggregate Operating Segments That Do Not Meet the Quantitative
      Thresholds* .
      EITF
      Issue 04-10 confirmed that operating segments that do not meet the quantitative
      thresholds can be aggregated only if aggregation is consistent with the
      objective and basic principles of SFAS 131, *Disclosure
      about Segments of an Enterprise and Related Information* .
      The
      consensus in this issue should be applied for fiscal years ending after
      September 30, 2005, and the corresponding information for earlier periods,
      including interim periods, should be restated unless it is impractical to do
      so.
      The adoption of EITF Issue 04-10 is not expected to have a material impact
      on our disclosures.




On
      March
      27, 2006, the FASB Staff Position No. FTB 85-4-1 *Accounting
      for Life Settlement Contracts by Third-Party Investors* (FSP FTB
      85-4-1) was issued. The FASB Staff Position states that an investor may elect
      to
      account for its investments in life settlement contracts using either the
      investment method or the fair value method. The election shall be made on an
      instrument-by instrument basis and is irrevocable. Under the investment method,
      an investor shall recognize the initial investment at the purchase price plus
      all initial direct costs. Continuing costs (policy premiums and direct external
      costs, if any) to keep the policy in force shall be capitalized. Under the
      fair
      value method, an investor shall recognize the initial investment at the purchase
      price. In subsequent periods, the investor shall remeasure the investment at
      fair value in its entirety at each reporting period and shall recognize change
      in fair value earnings (or other performance indicators for entities that do
      not
      report earnings) in the period in which the changes occur.  FSP
      FTB
      85-4-1 is required to be applied to fiscal years beginning after June 15, 2006.
      The adoption of FSP FTB 85-4-1 is expected to have a material impact on future
      disclosures. We have elected to adopt FSP FTB 85-4-1 as of March 1, 2006 (the
      beginning of fiscal 2007). We expect to value our investments in life settlement
      contracts using the investment method.




-33-
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 **Index
            to Financial
            Statements**




**(4)
      INVESTMENTS IN SECURITIES**




Our
      securities investments that are bought and held principally for the purpose
      of
      selling them in the near term are classified as trading securities. Trading
      securities are recorded at fair value on the balance sheet in current assets,
      with the change in fair value during the period included in
      earnings.




Securities
      investments that we have the positive intent and ability to hold to maturity
      are
      classified as held-to-maturity securities and recorded at amortized cost in
      investments and other assets. Securities investments not classified as either
      held-to-maturity or trading securities are classified as available-for-sale
      securities. Available-for-sale securities are recorded at fair value in
      investments and other assets on the balance sheet, with the change in fair
      value
      during the period excluded from earnings and recorded net of tax as a component
      of other comprehensive income.




The
      cost
      and estimated market value of the investment securities classified as
      available-for-sale as of February 28, 2006 are as follows:


**Gross**
            
            **Gross****Unrealized**
            
            **Unrealized**
            
            **Estimated****Cost**
            
            **Gains**
            
            **(Losses)**
            
            **Value**Market
                Income Funds
            
            $
            3,957,137
            
            $
            81,256
            
            $
            (322,715
            )
            $
            3,715,678




We
      incurred capitalized costs of $663,344 in connection with a
      limited
      partnership arrangement with a large
      U.S.-based investment firm. The limited
      partnership was designed to
      invest
      $50 million in life settlement contracts purchased through LPI during fiscal
      2007. The limited partnership has not made any purchases to date due to the
      stringent underwriting standards that the general partner is applying to the
      available contracts. If no purchases are made by August 13, 2006, the
      arrangement may be terminated by us without penalty. If the arrangement is
      terminated, we would be required to recognize those capitalized costs as an
      expense during the quarter in which the limited partnership was terminated.




**(5)
      LEASES**




We
      lease
      various equipment under non-cancelable operating leases expiring in various
      years through 2009.




Minimum
      future rental payments under non-cancelable operating leases having remaining
      terms in excess of one year as of February 28, 2006 for each of the next five
      years and in the aggregate are:


**Twelve
                months ending February 28,**
            
            **Amount**2007
            
            $
            36,6752008
            
            
            23,8382009
            
            
            1,833Total
                minimum future rental payments
            
            $
            62,346




Rental
      expense was $36,675 and $36,675 for the years ended February 28, 2006 and 2005,
      respectively.




Certain
      operating leases provide for renewal and/or purchase options. Generally,
      purchase options are at prices representing the expected fair market value
      of
      the property at the expiration of the lease term. Renewal options are for
      periods of one year at the rental rate specified in the lease.




-34-
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            to Financial
            Statements**




**(6)
      NOTE PAYABLE**




We
      maintain a revolving credit line of $2,400,000 for the purchase of policies
      for
      our own account and for short-term cash flow management.  The credit line
      is secured by our cash and securities on deposit.  As of February 28, 2006,
      the line of credit carried an interest rate of New York prime and had an
      outstanding balance of $1,891,018.




**(7)
      LONG-TERM DEBT**




As
      of
      February 28, 2006, we had the following long-term debt:


**Current**
            
            **Long-Term**5.625%
                note payable to a bank, due in installments of $6,270 through March
                2013,
                secured by land and office building
            
            $
            50,997
            
            $
            403,2485.51%
                note payable to a bank, due with accrued interest through August
                2007,
                secured by certificate of deposit
            
            
            —
            
            
            400,000Non-interest
                bearing note payable to an individual, due in semi-annual installments
                of
                $50,000 through December 2006, secured by Russian
                artifacts
            
            
            100,000
            
            
            —$
            150,997
            
            $
            803,248




Maturities
      on long-term debt for each of the next five years and thereafter are as follows:


**Amount**February
                28,2007
            
            $
            150,9972008
            
            
            453,0182009
            
            
            57,0542010
            
            
            60,3472011
            
            
            63,831Thereafter
            
            
            168,998$
            954,245


**(8)
      INCOME TAXES**




Temporary
      timing differences between the reporting of income and expenses for financial
      and income tax reporting purposes at February 28, 2006, result in an increase
      in
      the deferred tax asset of approximately $348,000, which we believe to be fully
      realizable.




Following
      are the components of the deferred tax asset as of February 28,
      2006:


Excess
                tax over financial accounting -Depreciation
            
            $
            (129,000
            )Excess
                financial accounting over tax -Accrued
                contingency costs
            
            
            214,000Reserve
                for premium advances
            
            
            967,000Acquired
                life insurance policies
            
            
            2,000IRS
                interest not deductible
            
            
            111,000Net
                deferred tax asset
            
            $
            1,165,000






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The
      difference between our effective income tax rate and the United States statutory
      rate and the State of Texas franchise tax rate is reconciled below for the
      years
      ended February 28, 2006 and 2005:


**2006**
            
            **2005**United
                States statutory rate
            
            
            34.0
            %
            
            34.0
            %State
                of Texas statutory rate
            
            
            4.5
            %
            
            4.5
            %Expected
                combined rate
            
            
            38.5
            %
            
            38.5
            %Additional
                tax associated with expenses not currently deductible for
                tax
            
            
            21.4
            %
            
            —Surtax
                and other
            
            
            (17.6
            )%
            
            (5.8
            )%Combined
                effective tax rate
            
            
            42.3
            %
            
            32.7
            %




**(9)
      SHAREHOLDERS’ EQUITY, STOCK TRANSACTIONS AND COMMON STOCK OPTIONS**




**Dividends** .
      We
      declared and paid dividends on a quarterly basis and in the amounts as set
      forth
      in the following table:


**Dividend****Date
                Declared**
            
            **Date
                Paid**
            
            **Amount**02/29/04
            
            
            03/15/04
            
            $
            0.0405/10/04
            
            
            06/15/04
            
            $
            0.0408/17/04
            
            
            09/15/04
            
            $
            0.0511/15/04
            
            
            12/15/04
            
            $
            0.0602/14/05
            
            
            03/15/05
            
            $
            0.0505/17/05
            
            
            06/17/05
            
            $
            0.0508/17/05
            
            
            09/19/05
            
            $
            0.0511/18/05
            
            
            12/14/05
            
            $
            0.0502/21/06
            
            
            03/15/06
            
            $
            0.05




**Stock
      Options.** In April
      2004 and November 2004, we granted stock options in the amount of 250,000 shares
      of its common stock to a consultant and licensee. Before 2006, we accounted
      for
      those options under the recognition and measurement provisions of APB Opinion
      No. 25, Accounting for Stock Issued to Employees, and related Interpretations.
      No stock-based employee compensation was reflected in 2005 net income, as all
      options granted under this plan had an exercise price equal to the market value
      of the underlying common stock on the date of grant. Effective March 1, 2005,
      we
      adopted the fair value recognition provisions of SFAS 123, Accounting for
      Stock-Based Compensation, SFAS 123(R), Share-Based Payment and SFAS 148,
      Accounting for Stock-Based Compensation-Transition and Disclosure.




SFAS
      123(R) established standards for the accounting of transactions in which an
      entity exchanges its equity instruments for goods or services by requiring
      a
      public entity to measure the cost of employee services received in exchange
      for
      an award of equity instruments based on the grant-date fair value of the award.
      That cost is recognized over the period during which an employee is required
      to
      provide services in exchange for the award. For all unvested options outstanding
      as of March 1, 2005, the previously measured but unrecognized compensation
      expense, based on the fair value at the original grant date, will be recognized
      in our financial statements over the remaining vesting period. For stock options
      granted or modified subsequent to March 1, 2005, compensation expense, based
      on
      the fair value on the date of grant or modification, will be recognized in
      our
      financial statements over the vesting period. The fair value of employee stock
      options is estimated using the Black-Scholes option pricing model. Excess tax
      benefits are recognized as an addition to paid-in capital. Cash retained as
      a
      result of those excess tax benefits is presented in the statement of cash flows
      as financing cash inflows. The write-off of deferred tax assets relating to
      unrealized tax benefits associated with recognized compensation cost is
      recognized as income tax expense unless there are excess tax benefits from
      previous awards remaining in paid-in capital to which it can be
      offset.




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Under
      the
      modified prospective method of adoption that we selected under the provision
      of
      SFAS 148, compensation cost recognized in fiscal 2006 is the same as that which
      would have been recognized had the recognition provisions of SFAS 123 been
      applied from its original effective date. Results for prior years have not
      been
      restated. For the years ended February 28, 2006 and 2005, we recorded $0 and
      $133,000, respectively, in compensation cost related to the stock
      options.




Information
      with respect to stock options and warrants outstanding to certain employees,
      directors and service providers are as follows:


**2006****Shares**
            
            **Average**
              **Exercise****Price**Outstanding
                at beginning of year
            
            
            250,000
            
            $
            6.02Exercised
            
            
            0
            
            $
            0.00Issued
            
            
            0
            
            $
            0.00Expired
            
            
            (50,000
            )
            $
            (6.00
            )Outstanding
                at the end of year
            
            
            200,000
            
            $
            6.02








**Options
                Outstanding**
            
            
            
            **Options
                Exercisable****Shares**
              **Outstanding**
              **At
                2/28/06**
            
            **Average**
              **Remaining**
              **Life
                (Years)**
            
            **Average**
              **Exercise
                Price**
            
            **Shares
                Outstanding 2/28/06**
            
            **Average**
              **Exercise****Price**100,000
            
            
            .58
            
            $
            6.00
            
            
            100,000
            
            $
            6.00100,000
            
            
            1.75
            
            $
            6.06
            
            
            100,000
            
            $
            6.06200,000
            
            
            2.33
            
            $
            6.02
            
            
            200,000
            
            $
            6.02




**(10)
      RELATED PARTY TRANSACTIONS**




We
      currently operate under an agreement with ESP Communications, Inc. (ESP), which
      is owned by the wife of our president. Under the agreement, ESP performs
      specified administrative duties on behalf of us. Either party may cancel the
      agreement with a thirty day written notice. We currently pay ESP $7,500 on
      a
      semi-monthly basis for its services. We recorded management services expense
      concerning this agreement with ESP of approximately $180,000 for each of the
      years ended February 28, 2006 and 2005.




**(11)
      CONTINGENCIES**




We
      are
      aware of certain instances wherein the insurance companies denied payment on
      policies in which LPI arranged the settlement with purchasers. Most of these
      denials relate to policies settled before 1998 and involve technical legal
      issues that were not fully appreciated when the policies were initially
      reviewed. Face value of the policies in question total $555,417. During the
      fiscal year ended February 28, 2006, we paid $15,000 to these purchasers and
      have accrued another $102,499 for future claims that might arise on these
      policies.




We
      have
      elected to advance premiums on certain older polices on which the initial
      premium payment reserves have been fully utilized. We have no legal obligation
      to make these advances and do so only in cases when there is a risk of policy
      lapse due to the failure of a purchaser to pay the premiums. We initiated and
      continue to follow this practice as a goodwill gesture. On final settlement,
      we
      are usually reimbursed for these advances. We have elected to reserve advances
      when collection is not certain and, if collectible, the time to collection
      is
      not certain. We believe we cannot reasonably estimate the future cost of the
      advances because we cannot predict the rate at which investors might fail to
      make premium payments. During the fiscal years ended February 28, 2006 and
      2005,
      we advanced premiums totaling $1,185,929 and $820,599, respectively, and
      received repayments of advances of $283,083 and $ 130,306,
      respectively.




-37-
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**EXHIBIT
      INDEX**




**DESCRIPTION
      OF EXHIBIT**




**Number**
              
              **Description**3.2
              
              Amended
                  Articles of Incorporation, dated February 19, 2003 (1)3.2
              
              Bylaws
                  (2)4.1
              
              Form
                  of stock certificate for our common stock (2)10.1
              
              LPHI
                  Omnibus Equity Compensation Plan* (2)14
              
              Code
                  of Ethics for Directors and Executive Officers (1)21
              
              Subsidiaries
                  of the Issuer31
              
              Rule
                  13a-14(a) Certifications32
              
              Section
                  1350 Certification





*
            Denotes
                a management contract or compensatory plans or
                arrangements.


(1)
            These
                exhibits were filed with our Annual Report on Form 10-KSB for the
                year
                ended February 29, 2004, and is incorporated by reference
                herein.


(2)
            These
                exhibits were filed with our Annual Report on Form 10-KSB for the
                year
                ended February 29, 2000, and are incorporated by reference
                herein.






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